Currently, the bank of Japan is running out of bonds from the government to buy. The Central Bank would be counterparts are also not willing to sell the debt which monetary policy makers have made a pledge to buy. The 30-year bond that was most recently used failed to record a single trade during a session last week since current owners opted to hoard all their holdings. The Japanese Central Bank has come up with a target of $960 billion in purchases of government bonds every year in a continuous attempt to curb deflation. This amount is about three times the issuance rate and sums up to about 1% of GDP, according to Orix Trading Executive Vice President of Portfolio Management, Robert Barkley.
However, safe assets such as government debt are not as attractive to central banks looking to coerce investors into other riskier assets thus push down the cost of borrowing. These assets are also in high demand by financial institutions since they can be used as collateral. This comes from the reasoning that whenever there is a dearth of safe assets, there is also the incentive and a tendency to manufacture them. This is the major headache that is faced by the Bank of Japan as they look for more government bonds to keep it afloat for the next two years. With an on-going fight to take care of a rapidly rising rate of inflation in economically unstable times.
Results in the past haven't been exactly pretty. There have been challenges and growing issues that have caused the financial institution to come up with new ways of asset management and investing in the right assets. Now as the Japanese bank starts to face the technical constraints of purchasing assets, Barkley proposes a radical solution: consolidate existing holdings of the Bank of Japan into a perpetual bond. This is a bond that has no maturity and has no principal repayment.
"There is an increasing realization that limits exist to how much more of these bonds can be acquired", Robert Barkley was quoted as saying. "The BOJ is getting to a shortage of bonds as commercial banks, insurance and pension funds which have run down in terms of holdings."
Barkley cited a working paper from the IMF which concluded that the needs of financial institutions such that the Bank of Japan might get forced to start tapering its acquisition of sovereign debt in 2017 or 2018 to further affirm his case.
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