Wednesday, March 16, 2016
Shape of graph for BOJ holdings of JGBs
In an article on the BOJ holdings of JGBs they have the above graph. Note that BOJ is Bank of Japan and JGB is Japanese Government Bonds. The red curve above is actual data and the blue part is a projection. I think the projection is wrong. The red part looks like it is curving up while the blue projection is linear. If the curve is really an exponential growth curve, and the projection is linear, then after a few years the projection will be way off. Even with this linear projection they get to owning about 50% of the JGBs within about 2 years. I don't believe there is any historical case of any country monetizing such a large fraction of such a large debt without very high inflation. If inflation picks up you can be sure everyone will want to dump their JGBs, since fixed rate bonds lose value fast as inflation picks up. This will make the BOJ buy even faster. So I expect the real graph will keep curving up.