Excess Liquidity and BOJ Balance Sheet.

 This is my first challenge to "note." in English for broader readers.

 Pen Name「損切丸」 ( Son-giri Maru) means "Loss Cut Boy", who had worked at a British bank for 22 years in charge of Japanese Yen funding and interest rates. During the carrier, lots of dialogues were made between BOJ, MOF or JFSA. Bases on those, more original Market note. is written here.

　As long as I recognize,  JPY Markets remain "particular" for Non-Japanese investors or traders, so I try to clarify some focal points.

 Main contents are :

 1. Excess Liquidity

 "Core" is Japan as "Deposit Kingdom" with more than ¥1000 trillion.

 2. BOJ Balance Sheet

  BOJ  "leveraged " such huge liquidity resource under  "Abenomics" . However, they fell into "Money Shortage" already.

 3. Interest rates " Normalization".

 Excess Liquidity would no longer added out of Japan as ever done, which could affect other markets, especially Stock Markets.

 1．Excess Liquidity ( EL )

 As broadly recognized, Flood of money had been added into markets mainly due to Quantitative Easing( QE ) by central banks. It had driven various markets volatility, especially Stock Markets.

 Key Focus is " Extra-Ordinary QE " by BOJ led by Kuroda. They purchased JGB, ETF, REIT, etc. using huge deposits in Japan.

 Japanese Banks have been suffered from TOO MUCH CASH put by BOJ.  They couldn't help investing them into higher yield bonds mainly in US. The uniqueness is they are reluctant to take FX risk, so they use Basis Swaps or FX Forward to swap JPY into USD rather than buying USD/JPY straight. 

 The amount was summed up to ¥400 trillion ( $3.8trillion), enough large to distort the Markets values. As interest rates have stayed " too low" for US investors, they tended to invest them mainly into Stock Markets. As long as I recognize, this is the "Core" of EL these years. 

 2. BOJ Balance Sheet ( B/S )

 The below is the summary of latest BOJ B/S @20 Nov 2020 :

 Please focus on " Gov't deposit " for ¥65.8trillion. In fact, the liquidity is created by issuances of short term Treasury Bills ( TB ). In other words, they started to DRAIN money from the markets. BOJ is no longer cash rich.

 The DRAINAGE started last summer in 2019. As a result, TONAR ( Tokyo Over Night Average Rate ) started to rise, coming closer to @0.00% time by time.  As BOJ B/S has expanded to ¥700 trillion, The DRAINAGE has been increasing from ¥16 trillion to ¥65.8 trillion.  ↓

3. Interest Rates ( IR ) " Normalization".

 As most of EL for $3.8 trillion out of Japan flew into US markets, 1st change was seen in US interest rates, e.g. 10 yr Treasury touched @0.98 recently. EL should never be added out of Japan. 

 I thought this is IR " Normalization". From now on, Stock markets is to be more affected by IR, different from those just driven by EL.  

 However, as the level of IR remain VERY LOW, Stock would rally for some more time. Anyway, the Key should be IR going forward.

 Must regret, JPY IR markets stayed more dull than US as Japanese banks are "more patient" to cooperate with BOJ or MOF ( Very Japanese ! ). However, at some points, JPY Markets might collapse suddenly ( as some of you would recognize, who ever traded JGB or JPY products ).

 Here, I summarized recent focal points.  Hope these helps.

 「損切丸」made more than 300 notes. in Japanese here. I might try English version again in case.

 Many thank for reading such long sentences.      All The Best.