If I was forced to guess what it was that specifically set off this “something” of growing “dollar” illiquidity since July, I would have to go back to the July 28 and 29 BoJ policy meeting. Initially, that was the decision that so disappointed at least against the backdrop of expectations of maybe the “helicopter.” But while the mainstream saw the decision under those traditional but misguided terms, the BoJ did intervene importantly in “dollars.”

In the short run, the shift seemed to have worked, as what were record negative basis swap premiums reversed, but then provided a catalyst for JGB turmoil. The volatility spreading throughout the global bond market may have been one avenue for disruption especially via the balance sheet math of volatility, but it may also have been due to the policy itself even though it appeared to have been so helpful in basis swaps. Central banks are loathe to admit they have a problem of any kind not just due to rational expectations theory but more practically based on the history of banking.

As an official, especially a monetary official, you never, ever speak ill of a bank under market suspicion lest you confirm that suspicion, warranted or not. It is the same stigma principle that completely thwarted the Discount Window; if you were a bank forced to go begging for funding from the Fed, no matter how easily you posted eligible collateral you were deemed irredeemably dangerous. Thus, by using the Discount Window all you were doing was confirming the worst as real.

In the case of Japan’s “dollar” shortage, it was more of a fuzzy notion often left alone in these esoteric and little understood markets that only the most wonkish insiders cared about. It could all plausibly be characterized in the mainstream as idiosyncratic and isolated conditions of mere trading imbalances; something to watch with worried fascination but not to get all worked up about.

But the BoJ acting on July 29 could only mean that there actually was “something” to all the whispers. As I wrote that day:

I don’t want to make too much in comparison to their reluctance to add to QQE, but it isn’t nothing that when the entire world expected them to act they did so where they did. It is an acknowledgement, I believe, that one of Japan’s most pressing issues is “dollar” and not just its own economic disaster. After all, Japanese companies that have been for decades upon decades financing in “dollars” have done so via Japanese banks. For the BoJ to step in for them at all confirms a great deal about what we long suspected with regard to the world’s biggest problem.

In the same spirit as the Discount Window, if BoJ was reluctantly drawn in to address the “dollar” problem, then it might have just confirmed to the rest of the world (the parts paying attention) that there was, in fact, a big enough “dollar” problem such that the Bank felt it necessary to address. It’s a much different risk proposition than strictly market innuendo. By the end of September, what had appeared to have worked in relieving Japan’s “dollar” pressure in late July was but a distant memory; cross currency basis swaps were at new record negatives all over again.

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