The Bank Of Japan's Voracious Appetite Has Paralyzed The Government Bond Market

Japan’s Ministry of Finance went to the trouble of creating a cute little mascot to sell government bonds. But there’s only one buyer that counts: The Bank of Japan. That’s not about to change—despite rising criticism of current stimulus policies.

- Christopher Anstey, Yuko Takeo, And Toru Fujioka

In the land that gave us Hello Kitty, it’s no surprise the Japanese government employs an endearing mascot to sell its bonds. His name is Kokusai-sensei. A pint-size rendition of him welcomes visitors to the investor relations office at the Ministry of Finance. Pudgy and professorial, he’s got his own Twitter account and stars in an online manga.

Yet this whole publicity campaign seems rather unnecessary. There’s just not much for Kokusai-sensei to do these days, thanks to the existence of a single, massive buyer of Japanese government bonds: the Bank of Japan. Why bother to encourage private investors to buy JGBs when the BOJ has been devouring enough of them to finance the bulk of the government budget deficit since Prime Minister Shinzo Abe took office in December 2012?

Japan’s central bank has clamped a tight grip on the bond market in an effort to pull down borrowing costs and inject massive liquidity—all to propel the nation out of the deflation and stagnation that took hold in the 1990s. It’s worked, up to a point. In recent years, BOJ Governor Haruhiko Kuroda’s policy, backed by Abe, has helped boost growth and incomes in the world’s third-largest economy.

But the negative side effects of the Abe-Kuroda strategy are starting to pile up as investors and lenders increasingly struggle to cope with zero interest rates. Rock-bottom rates help sustain unproductive companies by shielding them from market forces. They also diminish the capacity of weak banks to absorb losses, especially regional institutions without nationwide networks.