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BOJ’s government bond lending surges as market dries up

Nikkei  |  Asian Review

TOKYO — The Bank of Japan is rapidly increasing its lending of government bonds to financial institutions facing difficulty acquiring securities as the central bank’s own massive asset purchases deplete the supply.

The central bank lent just over 3.9 trillion ($34.2 billion) in Japanese government bonds through its securities lending facility in February, an unprecedented scale over 13 times the level seen a year before.

The bonds are offered overnight with repurchase agreements in response to financial institutions’ daily demand. Securities brokerages and others are borrowing the instruments for fund settlements.

This lending facility was positioned as a last-ditch measure for securities companies that could not procure JGBs on the market to sell to client investors. The central bank charges an annual rate of at least 0.5%, a rate higher than those offered in the private sector during normal times. It is in a sense a penalty payment for companies failing to secure the bonds they needed.

Yet, the BOJ’s own extensive purchasing of JGBs is the main reason so many companies are now turning to it to borrow. Some hotly demanded securities end up being cheaper to obtain through the BOJ facility than on the market. “Borrowing costs on the market temporarily approached an annual 1% rate” for some such securities this year, said Takenobu Nakashima, a quantitative analyst at Nomura Securities.

The Bank of Japan held roughly 40% of outstanding JGBs as of the end of January — far more than the slightly over 10% it held in April 2013, just before it introduced its unprecedented scale of quantitative and qualitative monetary easing. The JGB lending spike illustrates how the central bank’s monetary policy has distorted the market.

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