The Bank Of Japan On 2 Opposing Ends Of The Credit Transmission Barbell

by: The Motley Monetarist


The BOJ has been wringing its hands on the ineffectiveness of its quantitative easing on the real economy.

Like the ECB that preceded it, the BOJ has inaugurated an era of negative interest rates to further attempt to loosen bank credit.

However the said ineffectiveness may not matter if the experience of Toyota is any indication, said company awash in cash and investing heavily.

The Bank of Japan and Toyota Motors on two opposing ends of the credit channel barbell.

"Revenue is vanity, margin is sanity, cash is king." Proverb

The Bank of Japan has recently entered into the negative interest rate netherworld, following the ECB. It should be noted that the negative interest rates are only to be applied to new reserves that banks hold. The BOJ is relentlessly pushing what it coyly calls its QQE (qualitative and quantitative easing). It doesn't seem enough to characterize the easing quantitative. It also has to be qualitative. As a result, longer-term yields are being pushed into record lows, as the following graph of 10 year zero coupon yields show.

Source: ECB statistical data warehouse

In a policy meeting last October, the BOJ decided to continue asset purchases to the tune of 80 trillion yen a year. The BOJ is still targeting inflation at 2%, but it seems at this point other considerations remain paramount for the BOJ. The crucial question-does it matter? To the players that matter? The Japanese companies that make up the fabric of the Japanese economy? One such is Toyota(NYSE:TM), buffeted by the waves of Abenomics like other companies, but rising above the fray. Outside of the economic context, Japan has been shaken by a new wave of earthquakes and Prime Minister Abe may feel confident enough politically that he may decide to hold early general elections. However, it is unlikely that there will be a significant change in BOJ policy; one assumes that QQE will continue unabated even if the political context changes.

The BOJ tilts yet again at the QQE windmill.

In a 2009 policy statement, the BOJ spelt out that outright purchases of corporate instruments should be implemented exceptionally, given the higher risk involved. Yet it has pursued such a policy since that time. The following table shows how the BOJ's "non-traditional" asset base changed between 2014 and 2015. Of course the lion's share of the increase was due to Japanese government bonds. Yet the BOJ dabbled in the commercial paper, corporate bond market, exchange traded funds and even REIT's to a significant extent, staying true to its policy of engaging in qualitative as well as quantitative easing. The table below doesn't show the comparison with 2014, but the BOJ pace of buying non-traditional assets increased significantly in 2015.

Increase in JGB's

Increase in commercial paper

Increase in corporate bonds

Increase in pecuniary trusts (stocks held as trust property)

Increase in pecuniary trusts (index-linked exchange traded funds held as trust property

Increase in pecuniary trusts (real estate investment trusts held as trust property)

Change in BOJ's assets between 2014 and 2015







Click to enlarge

Increase in discounted loans and bills

Increase in foreign currency assets



Click to enlarge

Source: BOJ annual review 2015.

Despite these efforts, commercial banks have been highly averse to issuing loans over the past two years, as the following graph shows.

Source: Bank of Japan statistics

In fact, this experience is a repeat of the results of QE when the BOJ first initiated the program in 2001, following two years of a Zero Interest Rate policy (ZIRP). Weak credit initiation by commercial banks and corporate deleveraging dogged the policy of the central bank even then, the reduced yields not being translated into increase loans.

Toyota awash in cash and bucking the trend.

Take the example of Toyota Motors, a representative Japanese corporate entity, presumably on the receiving end of the BOJ quantitative easing largesse. Recently its stock performance has been relatively mediocre, returning .35% on average over the past two years.

But if one looks beyond the stock performance at the underlying trends, one sees a company that despite its grandiose slogan, "our company's DNA will survive for a hundred years" is, in fact investing in thermal efficiency in gas engines, moving forward with its hybrid program and expanding in developing markets. It posted an increase in EPS of 9.4% (in yen). Not all of this success can be attributed to the state of the yen (any weakness of the yen was counteracted by a 76% decline in its income from foreign exchange over the past nine months). With respect to the interests of this article, what is significant in Toyota's case is its significant cash holdings. The question is why time deposits increased the way they did, which given an average nominal interest rate of .1%, and an inflation rate of .3% amounts to a rate on time deposits of -.2%.

It should be noted the relatively significant reliance by Toyota on AA mezzanine equity, which should be considered a component of long-term debt.

% increase in cash.

% increase in time deposits

% increase in investments in marketable securities

% increase in long-term debt

% increase in investment activities (from cash flow changes for first nine months)

% of mezzanine equity in overall equity

From TM third quarter FY 2016 balance sheet







Click to enlarge

Source: FY third quarter financial results.

Why the disconnect between BOJ and Toyota?

While Toyota may not be representative of all of Japanese industry, yet its experience is illustrative of the disconnect between the desired ends of the BOJ quantitative easing posture and what is happening at the other end of the credit channeling barbell. The onset of negative interest rates will provide a further disincentive for Japanese banks to lend, if the European experience so far is any indicator, but it seems that Japanese companies like Toyota are tooling on, nevertheless, using their own cash balances to invest.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.