The Chart That The BoJ Is Most Worried About (And So Should You Be) Submitted by Tyler Durden on 05/26/2013 18:01 -0400 Bond CDS China Fail Japan Lehman Reality Repo Market Volatility Until the last few days, the attention of the mainstream business media has been on how 'wonderful' Japan's policy prescription must be since its stock market is soaring at a record pace. The reality is that the far bigger JGB market has been crumbling . As we explained here , this is a major problem for the bubble-blowers, as the extreme volatility (VaR shock) that the Japanese Government Bond market has been through in the last few weeks has some very large and painful consequences, that as yet, have not been discussed widely. The term 'shadow banking' has been one ZH readers are by now extremely familiar with as we have discussed this as the panacea of unseen leverage ( most recently in Europe and China ) for years; the funding markets in Japan, so heavily reliant on JGB repo for short-term liquidity and the efficient functioning of two-way markets in the bonds, are hitting a wall. As JPMorgan notes, the number of JGB 'fails' - where a repo deal breaks down - has more than doubled in the last week. For a market that represents 40% of the total Japanese money-market, this will be a critical area to watch for a JGB waterfall. Via JPMorgan: The sharp rise in JGB volatility has not left the JGB repo market unaffected. The 80tr large Japanese repo market accounts for 40% of the total size of Japanese money market (which it also includes CDs/CPs, currency swaps, BoJ money market operations, and Call transactions) and it is an important lubricant of the JGB market. This is because repos with JGBs as collateral, account for more than 99% of domestic repo transactions. The haircuts are typically very low in the JGB repo market ranging from zero to 2%. This is because market participants are comfortable or accustomed to control risks through margin calls without often setting a haircut upfront. But these margin calls or haircuts where applicable, tend to rise when volatility rises. And the rise in margin calls or haircuts has caused a rise in “fails” . 175 fails in the month of April represents a sharp increase from March but it is still much lower from the 1000 figures seen immediately post Lehman. A fail is a situation where a recipient of JGBs in a transaction does not receive the JGBs from the delivering party on the scheduled settlement date. Typically the number of fails in Japan is quite small, partly because market participants try to avoid fails in advance, and because some market participants have never experienced fails. According to the BoJ, the situation is quite different from that prevailing in US repo markets, where fails occur much more frequently than in Japan and where market participants take action in accordance with the fails practice on a daily basis. The retrenchment in Japanese repo market is then fed into the JGB market propagating the initial volatility (VaR) shock. The repo market is used by market participants for funding or short selling and its functioning is important in maintaining a two-way market for JGBs.
As Goes China, So Goes The World And Definitely Australia Submitted by Tyler Durden on 02/26/2013 18:11 -0500 Australia China Japan While China depends on only one nation for 15% or more of its exports (US 17.3%), Bloomberg's Michael McDonough notes that an incredible 35 nations depend of China for at least 15% of the exports; up from just 4 in 2001. Most are emerging markets or major commodity producers with the shift being driven by China's demand for raw materials, fueled by its investment-led growth model and the stimulus package following the global financial crisis. This gross dependence leaves the world's economy increasingly susceptible to shifts in the Chinese business cycle - most notably Australia which relies on China for a massive 30% of its export demand . This is almost double the next largest developed nation of Japan (which relies on China for 18.5% of its exports) though tensions between the two nations has led to an almost 10% decline in Chinese imports of Japanese goods since September . As we have noted, China has become a key source of FDI in Africa in recent years and 12 of the 20 most-China-dependent economies are from that continent; but as China attempts to transition from investment toward consumption, demand for commodities may slow and downside risk grows for these dependent commodity-producing nations . Charts: Bloomberg Briefs Average: 4.88889 Your rating: None Average: 4.9 ( 9 votes) Tweet Login or register to post comments 7738 reads Printer-friendly version Send to friend Similar Articles You Might Enjoy: China, Japan, And The US - Tying It All Together Guest Post: China, Inflation Gold: China Created Paper Money And Paper Money Then Created Inflation Goldman Downgrades China, Upgrades The Nikkei, As It Hikes Oil, And Other Non-Sequiturs Guest Post: China, Japan And The Senkaku Islands: The Roots Of Conflict Go Back To 1274 French Downgrade Comes And Goes As Europe Open Fills EURUSD Gap
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