The BOJ’s QT, inflation that’s higher than in the US, an atrocious fiscal mess, a devalued yen, it all comes together.
By Wolf Richter for WOLF STREET.
Japan, which now has substantially more inflation than the US – 3.6% overall CPI and 3.2% core CPI – is watching in astonishment as its very-long-term bond yields spike in a dramatic manner, while the Bank of Japan has accelerated QT this year, which it started in mid-2024.
The superhero is the 40-year JGB yield, which jumped another 11 basis points at the moment, for a spike of 100 basis points since the beginning of April, to 3.56% at the moment. A rising yield means a falling price.
Despite the breathtaking spike, the 40-year yield is still a hair below the rate of Japan’s overall inflation rate, and thereby a hair negative in real terms, and new bond buyers are still getting ripped off in terms of yield.
And bond holders that bought new 40-year bonds a few years ago when the 40-year yield was below 1% or even below 0.5% are getting crushed on price, because a yield spike like this in a very-long-term bond means that the market price of the bond collapses. If they don’t want to take the loss selling it, they can hold the bond to maturity, collecting a miserable 0.5% or whatever in coupon interest a year, for decades, and then finally get paid face value when the bond matures, and the purchasing power of that face value will be much diminished by decades of inflation. Inflation without compensation.
Japan’s credit rating – A1 by Moody’s, A+ by S&P – is three notches worse than the blemished US credit rating (my cheat sheet for bond credit ratings).
Prime Minister Shigeru Ishiba, when he argued in Parliament on Monday against tax cuts funded by more debt issuance, called Japan’s financial situation “extremely poor, worse than Greece’s,” which it has been for many years in terms of its debt-to-GDP ratio. But Japan is not Greece. It has its own currency and sits on trillions of dollars in foreign-currency denominated securities, including $1.13 trillion in US Treasury securities, that it can sell to prop up the yen, and it’s a major exporter of high-value manufactured goods. But the yen did plunge against the USD and other major currencies over the past few years.
Despite the yield-spike, and despite Japan’s fiscal problems and inflation, the 40-year yield is still below the US 30-year Treasury yield, which earlier today briefly flirted with 5.0% again.
So these 40-year JGBs are still a terrible deal, which had become clear to potential buyers, and they lost interest. And so the yield is rising, trying to find buyers, now that the BOJ has started shedding its own holdings.
But the BOJ still holds 52% of all JGBs, and paper losses (or actual losses) don’t matter to a central bank. And government-controlled entities hold another big portion of JGBs. Despite Japan’s huge debt, not all that much is in private hands.
The 30-year JGB yield jumped 11 basis points to 3.09% at the moment, after a majestic spike, as market participants grapple with the prospect of continued and possibly hotter inflation – because hotter inflation is a way to deal with the fiscal mess at this late stage – and they’re grappling with the scary notion that the BOJ, now surrounded by inflation, will no longer be the relentless bid in the bond market that will push prices back up and yields back down. That era may be over.
Yen carry trade less attractive? Very long-term yields in this range are beginning to offer an alternative to the yen carry trade. Japanese investors can still borrow at low short-term rates in Japan but invest in long-term JGBs, instead of selling the yen for dollars and buying US securities with higher yields. Sticking to yen investments would avoid the risks and costs associated with foreign currency investments. If these high long-term yields progress, they would drain some buyers from foreign markets, such as the US Treasury market.
All these highly leveraged bond trades are risky, and a lot of things can go wrong, including sharp interest-rate moves and currency moves, but years of central bank yield repression leads to risky yield chasing.
The 10-year JGB yield has risen in a much more modest manner to just 1.53% currently, less than half the rate of inflation, thereby steeply negative in real terms, and thereby a massively ugly deal. But it’s up from the negative yields it experienced off and on from 2016 through 2019.
This long-term chart shows that even the Japanese bond market used to be a fairly normal bond market until the 1990s when the falling debris from the implosion of the 1980s asset-price bubble kept hitting the economy.
QT accelerates. The BOJ has reduced its holdings of JGBs by ¥25 trillion ($172 billion) from the peak in February 2024 through March 31, the end of its fiscal year. This has brought holdings to ¥576 trillion ($3.98 trillion), the lowest level since December 2022.
The BOJ’s government securities holdings move in three-month cycles due to the timing of when long-term bonds mature and when they’re replaced with newly issued bonds of the same type. In terms of this three-month cycle, the peak of government securities holdings was the period of October-December 2023. Compared to December 2023, its JGB holdings fell by ¥16.3 trillion ($112 billion).
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This is No ‘small thing’ They are caught in a vice as they see China eat their lunch and dinner in Vehicle, electronics and CNC machines. All they have is Mrs Wannabe US T bill “carry trade’ of about $1.2 trillion and the margins are getting small when you have currency risk.
These are tremors but if the Tarif war with them is not favorable they will have no other option but to ‘Pearl Harbour’ the Federal Reserve (as they have so said) .
Nothing good comes from this.
‘Old age and treachery will defeat youth and skill every day’
With such a high yield I can’t understand why these Japanese bonds are not snapped up 110% at every auction. /s
Because, as Wolf said, “Despite the breathtaking spike, the 40-year yield is still a hair below the rate of Japan’s overall inflation rate, and thereby a hair negative in real terms.”
The BOJ may have to raise rates further to combat inflation which means prices will drop further, too, so no short-term capital-gains to be made either.
Just saw the “/s”. Sorry.
What do these events portend for the US?
Lets get the popcorn….. and watch Japan bond market cra peanut butter hit the fan, them bring everything down with it ……
Before you dance on Japan’s grave, realize that Japan has more or less been run by the same kind of Keynesian Kancer french-kissers as in the US – syphilitic politicians for whom today’s pimpery has always meant much more than the long term economic fate of the nation.
You don’t get debt levels well in excess of GDP (artificially inflated itself) without relentless decades of irresponsibility and unconcern.
If only we could get DC’s 2-3k ex-Congress people to ritually disembowel themselves in atonement.
I recall that about 5-10 years ago, Japan was consulting with Paul Krugman. Not sure if he’s still in the loop.
Well that explains it loo
Do you mean Poor Crookman? As his name is pronounced in Japan!
what’s their debt to GDP? 300+
Wikipedia has JPN Gvt debt at 251% of GDP.
(One note – it seems to me that I’ve seen that 250% figure for a *longgg* time – from various sources. Which given how the world is, makes me very, very curious. “Official numbers” can magically explode post-Crisis – ask Greece)
(Second note – Nations incentivize their debt to fall in various silos – Gvt., Corporate, Household. I tend to think it is the aggregate total that matters since you never know when some bullsh*t bailout will move weight into the Gvt silo…destined for conversion into inflation…)
256 percent. Sudan, Japan, then the US then Italy are the next highest in that order.
It seems like they finally decided to sort out their fiscal mess, what they should have done 30 years ago, or better yet, what they should have never attempted to do, namely try to manage the economy with financial wizardry.
If the new government will be able to hold out against the pressure to restart the sorcery, the financial situation will be much improved in 10 years time. At least that’s my view on it, but that’s a pretty big IF.
Sometimes the financial wizardry is necessary, though. Not all legerdemain is just tomfoolery; the measures taken to stabilize the situation often demand extraordinary lengths be taken.
Greg,
But politicians perpetually telling themselves that from the *start* (“Gotta deficit spend – coincidentally accruing kickbacks – to save the Nation! My perfidy is patriotic!!”) is how you turn pantomines of economic apocalypse into actual economic apocalypse over decades.
Treating price deflation as the end of life on earth and just a “widdle bit” of uncontrolled inflation as harmless is how you end up with uncontrolled inflation.
It is no mistake that all these errors only operate in the direction of one entity appropriating the spending power of another entity’s savings “for the Children!!”
(I still remember those AARP child-led ads from 10+ years back – it was like watching fiscal pedophiles advertise free puppies in the back of their van.)
Sorry Greg, but out of all due respect, I just can’t accept that answer. It’s the soft close that everyone uses. It’s like the answer you often hear about the level of Government Intrusion into our privacy rights. Which often sounds like , “Well, if you’re not doing anything wrong, you shouldn’t worry about what the Government is doing .” Every so called “justifiable wizardry moment “ that the US has engaged in (think LTCM, some Dot Com wizardry, the Great Recession, interest rate wizardry and especially the Covid wizardry) continues to add to the current manifestation of our soon to be called “The Great bursting of the everything bubble”. Most of this has happened as a result of not just printing money until obliviousness, but in the manipulation of interest rates! In each case: 1. Govt debt has contributed to skyrocket. 2. Asset prices rose well beyond “normal” valuations.
This one might not end well Greg.
“finally decided to sort out their fiscal mess”
The most shocking part of the whole thing – is the public admission that the Keynesian string is utterly played out – something energetically obscured for decades in the service of politics.
I actually read Keynes and this is not at all what he proposed. What he said is that in times of deep crisis the government should raise spending and cut taxes, while in the good times the government should raise taxes and cut spending. If you follow the actions of the modern financial wizards, all they do is the first part, and they do that even when the situation is just a tad bit too slow.
This is not Keynesian economics at all, this is the private sector burdening the public with debt for the sake of profits. This is the communism of the upper classes, no rich person left behind.
Thank you for a bit of reality, though I don’t agree with your final sentence. Throughout my life I have seen administrations cut taxes and raise debt in good times, exactly opposite of what should happen.
The insanity of ultra low interest rates is coming home to roost.
This is a what is going to happen to the US bond market as Congress gets bogged down trying to pass a budget. No one here is serious about cutting spending. It’s all smoke and mirrors. The bond vigilantees are waiting on the side lines and warming up the bullpen. The 30 year bond will be the first security to crash, just like in Japan. There will be no buyers at the auctions and the rates will have to go up substantially.
Swamp Creature, the first step from a serious, fiscally responsible leader is not cutting spending. It is simply to stop cutting taxes to the bone. That is how screwed up our political dialogue really is.
Taken from FRED: Govt. expenditures: 4.8T pre covid – 7.1T post covid.
Yes, we have a lot of cutting to do.
You’ve got this dead backward. Spending at the Federal level is up 40% in 5 years with nothing concrete to show for it. Federal revenue is up during this same time almost 25% despite the 2017 tax cuts. It’s pretty clear where the problem is, and it isn’t on the revenue side.
“…it isn’t on the revenue side.”
Now wait a minute. You said, revenues rose 25% in the five years 2020-2024 (not adjusted for inflation). But here it is: current-dollar GDP (not adjusted for inflation) rose 35% over the same period. So revenue growth fell dramatically behind GDP growth. That IS a revenue problem.
But there is also a big spending problem, obviously. I just hate it when people twist stuff to suit their Heritage Foundation narrative.
@Wolf,
Fair enough, revenue growth lags GDP growth by 10%.
So there is a revenue problem, but it is smaller than the spending problem.
And if GDP is increasing more than government revenue, isn’t that what we all should want? Government that learns to live within it’s means so that the increasing GDP can build the wealth and standard of living of the country instead of fueling boondoggles like the IRA?
“Bond vigilantes”? LOL! No such thing. Americans 401ks and pensions are forced to buy a certain amount of bonds. Wolf, educate this swamp creature on who buys and holds U.S. bonds. There is no true market (bond or otherwise) for true price discovery, This is the single underlying problem with the world today IMO.
Here is who holds the $36.2 trillion in US Treasury securities:
https://wolfstreet.com/2025/03/18/who-holds-the-ballooning-us-government-debt-even-as-the-fed-and-foreign-holders-unloaded-treasury-securities-in-q4/
Thanks. Just bought your book from Amazon
Thank you! Which one?
1. Prices are set at the margin. Even if 80% of buyers “must” buy, they will do so at the market rate set by the 20% willing participants
2. Who says any private investment plan “must” buy bonds? Only the administrators, and they are allowed to change their mind.
None of my 401k plans required me to hold bonds if I chose not to.
We know that market forces can drive bonds yields, because they change every day.
Only a moron believes a 5% return on a 30-year bond is accurately pricing the true risk of the U.S. government, or any government in the current environment. You sound like the eCONomic propaganda believer. Are you another Harvard Business school graduate, or one of Bernanke’s students? LOL!
Whether or not the monetary priests and their believers like it. Risk is being repriced…
thanks for the laugh.
The population of Japan is shrinking almost a million people a year, currently a little less than 130 million. In 30 years, those bonds may be paid by a much smaller population base. I don’t think we have historical examples of a country shrinking this fast with obligations like this. It can’t possibly work long term.
Ironically, I am writing this from Japan, we are in Kyushu this week, it’s lovely if a bit hot.
One factor, the USA did not exclude the “gaijin” to nearly the same extent, or age out to that extent, right? Are robots coming online in Japan at scale? And exportably? With the twists and turns of AI, it will be interesting everywhere.
AI is overrated. Robots outside of industrial manufacturing and some carpet use cases are very, very overrated. Fembots are still, sadly, like fusion. Just 50 from now, forever.
Biorobots are still going strong.
Good insight. One of several that is going to tank Japan soon. The other being China and the other ASEAN countries that have ramped up their manufacturing game to compete against Japan. China is now the largest car maker in the world and the quality has followed suit.
And don’t forget one very significant historical insight: China absolutely hates Japan. And for good reasons. China has no intention of defeating Japan militarily. It is much cleaner and more efficient to defeat them economically.
Japan’s financial situation is much like the US but without the benefit of being the reserve currency. Even that ‘extraordinary privelage’ will not save the US in the long run as the rest of the world pivots towards China and its economic partners.
As mentioned before, China has no interest in taking over reserve currency role. What they are doing in an accelerated way is establishing trading systems that exclude the dollar. As time goes on, less and less use of the dollar for trade is highly inflationary, for the dollar. This is why I believe the US will experience massive stagflation in the coming years. The unending budget deficits and overall debt will add to the problem and the be the nail in the coffin.
Exactly right. Colombia announced that they are getting on board with China’s trade and infrastructure initiatives. I would love to see Canada and Mexico sign up as well. Canada should quit NORAD immediately and arm themselves with a nuclear arsenal of their own.
Bingo. On average, Americans like to think that demographics don’t matter. Americans also want a European lifestyle without paying any taxes…
morons (on average).
You guys wishcast the China shit constantly. Escierto is the worst one.
At one point, I had not set foot in a China Mart (Wal-Mart) in over a decade and I spent most of that time looking for products not made in China. Of course now that we are actively trying to destroy everything good about this country, I said to hell with it.
Lol escierto get a grip
“China has no interest in taking over reserve currency role”
Which is wise. Reserve currency is a double-edged sword. In order to serve as a reserve currency, the corresponding nation must run a trade deficit. How else would other nations end up with your currency?
Other way around. Having the largest reserve currency has ENABLED the US to have a huge trade deficit.
The euro is the second largest reserve currency, and the euro area has a HUGE trade SURPLUS with the rest of the world.
The dollars share of reserves is 58%, the euro’s 20%.
China’s RMB is already a reserve currency, but a small one.
https://wolfstreet.com/2025/03/31/status-of-us-dollar-as-global-reserve-currency-central-banks-diversify-into-other-currencies-and-gold/
“How else would other nations end up with your currency?”
Investment. The dollar was the reserve currency with small US trade surpluses from the end of WW2 until the 1970s (See Historic U.S. Trade Deficits from the St. Louis Fed). Which I think confirms Wolf’s assertion reserve currency status enabled the huge trade deficit, but it was not the cause. I think your question is asserted by those who have gotten rich off the status quo and want to maintain it because it sounds plausible, even though it’s historically incorrect.
Yes, I also find that very ironic. Thanks for sharing the irony.
But Japan has a history of swift change at important historical moments, so it is possible that a similar dramatic change will occur. I emailed the Prime Minister and suggested that Japan should actively seek out and encourage the young descendants of Japanese American ancestry to apply for easy to get work visas. It’s too late for my kids, but I’m sure they would have liked the opportunity.
And so will go the mess in the US. It is not the population, it is the population of productive people who contribute to an economy and pay taxes.
No one is willing to fix our spending problem, as that is not how you win elections in America. Land of the free ride!
The real question is what will be the buying power of a dollar!
The random chaos of our current administration will only hurt in the long run.
If Made In America was the answer, we would not be in this situation in the first place.
Unless you want to have alot of dollars and still be poor, you better think about diversification.
I’ve often thought you could look at the UK and a few other EU countries and just realize they are 50 to 100 years ahead of us in decline. Not sure if that is accurate but feels that way.
Not 50-100. Try more like 10-20.
I have the opposite view. The Europeans and Japanese are years ahead of us, because most have learned the most important lesson of current world finances, capitalism is the engine of socialism. The application is lacking is some places, but that usually is due to culture. Their financial problems are mostly the result of demographics.
Japanese leadership in finance and governance has been fantastic in their use of innovation. They have created a society that demographic decline is now ensured, combined with fiscal suicide.
And that model is being followed by so many countries. Now we in America seem to have decided to vote for decline, hidden in illusion.
People used to sacrifice for the future. Now, enjoy the ride.
In the US, rates are grinding higher. But in Japan, after decades of technocratic intervention, rates have leapfrogged into the “lurching higher” phase.
Wolf said “And bond holders that bought new 40-year bonds a few years ago when the 40-year yield was below 1% or even below 0.5% are getting crushed on price, because a yield spike like this in a very-long-term bond means that the market price of the bond collapses.”
Who’s left with an untenable balance sheet mismatch? Any guesses on where the next financial system hotspot emerges?
52% of JGBs are held by the BOJ, and the BOJ doesn’t really care about the market value of its holdings. Other big junks of JGBs are held by government-controlled entities, including the Government Pension Investment Fund (largest pension fund in the world), the Japan Post Bank, and others. So of the huge amount of debt, only a portion is held by private entities.
Hi Wolf,
I think you outdid yourself with this examination of the JGB situation. Given Japan’s unique demographics, would it be incorrect to suggest just the 12% of JGB debt held outside of Japan to be considered marketable using the UST/Fed standard?
I read, and I saw that section in the article.
I guess I still don’t understand. This is THE definition of “robbing Peter to pay Paul,” right?
If 88% of my debt is owed from my left pocket to my right: can’t I just forgive and forget?
I am reminded of the Mexican “new peso.” I was a kid in 1993, but as Google refreshed me: “They took 3 0s off the currency.”
Why wouldn’t they forget about the 88% of their own debt, and re-issue a new currency? I have no idea what that looks like in practice; I can’t imagine a population would love “losing” their savings (I am sure the Japanese won’t riot, too civil).
Eventually they all lose anyway? It’s either now, all of sudden, or slowly over time? I’m not a currency expert (obviously), but I know this happens (just not with a nation with so much international trade?).
You — being a government or central bank — can do anything you want… print money, cancel debt, etc. But you HAVE TO LIVE WITH THE CONSEQUENCES.
And the consequences boil down to INFLATION and CURRENCY destruction.
Many years ago, when the comment section of Zero Hedge was still readable, someone asked “Who the heck is going to buy all these Japanese government bonds?!”
One wag replied, “That’s the real reason Japan is developing robots.”
:D
(It’s my all-time favourite comment on ANY site.)
Thanks Wolf for the great article! The financial mismanagement of government debt and taxation doesn’t appear slowly: it’s a situation where politicians are in denial until a sudden (over a year or two) explosion of reality hits the markets. I am often surprised how US financial wizards (advisers, pundits and big money) also are asleep but suddenly awaken with a snort. SVP was a recent example of that pattern. I expect Japan to have a “come to Jesus” moment within the next decade. Like a bar party where the drinks flow freely, then the waiter says pay up the bar is closing. Screams, rage, panic, and denial are the payments!
Twas ever thus!
keeping an eye on the Yen, it’s slowly overcoming obstacles on the charts and is at point that could rocket ship higher. Higher yen equals risk off trade we are 43 calendar days from the our equity Low, it’s about time to switch directions based on historic bear market rally durations. The carry trade unwind in Aug 2024 shot the $vix up to 63ish. This could be the fuel for the $vix in the coming days weeks and months. Aug 2024 $vix spike from fear of carry trade unwind was the shot over the bow that the whole system was at risk. It appears retail investors are all in. Max pain ahead?
Great summary of the Japanese situation…wolfman nails it again. The Whartons,Stanfords,Harvard’s ,Yales and Mits have a simple and foolproof solution….it Always..Always..works.,!!! Massive immigration ftom the third world…..!!! We have to increase global population..!! One billion Amerikans..!! One madness replaced by an even worse disease. Insanity has replaced rationality. Good luck to the planet.
Yep. Why do these “educated” people push this forever exponential growth model? Clearly they never took ecology, biochemistry, or physics. There are numerous chemical cycles that require tremendous energy input to simply sustain life. Thermodynamics wins no matter what the talking heads say.
You think going against the grain gets you a cushy tenured position at Yale? No you have to spew support of the current economic position to get high up. You don’t notice any heterodox economists at Harvard, do you?
Well, let’s be clear, eCONomics is NOT a hard science in the first place. It’s a social science and why on most campuses they keep the eCONomics professors as far away from the chemists and physicists as they can. Economists are typical part of the business (propaganda) school while the hard sciences are in a college of Arts and Sciences…
But exactly right, just look at Krugman. His “work” constantly contradicts itself.
Well said !! Life is a thermo problem as well as sustaining life . Mass and energy balance. Maybe the next Tesla Model will be a taxi to Mars
The plant will be just fine.
You don’t get points for common sense in ivory towers.
Japan is a career dead end for people who are not natives. I hate to be a counter point, but if US, EU, and developed Asia don’t embrace substantial 3rd world immigration, they will sink into a demographic dead end of shrinking population and debt. So it is literally the only way out absent am increase in birthrates or massive cuts to the welfare state.
40 year bond. Might as well make them interest -only forever bonds.
Projecting out 150 years – the last 20 million Japanese own the entire island and owe themselves 500 quintillion Yen.
I was looking at a an 1875 publication showing German municipal bonds issued in the 1870s, some maturing in 1955. They were in the 3% to 5% range, mainly for water supply and sanitation. I wonder how a city, like Berlin, would now deal with paying off a bond issued in 1870 which matured in 1955.
By 1955, the 1875 bond (denominated in German mark, the original one) wasn’t worth the paper the bond was printed on in modern Deutschmark. And there was nothing to pay off. Whoever issued the bond never had to pay it back. That’s what hyperinflation will do to bonds. It made them essentially worthless.
I would have thought that a municipality like Berlin who issued the bond would be obligated to pay it off. But then I recall the hyperinflation in Germany between the wars. With bonds, as rates go up, the price goes down, so, yes, the bond would be worth nothing in Weimar Germany. There are also the issues of changes in currency, the Treaty of Versailles, and the 1940s world war. There was great optimism in Germany in the latter part of the 19th century. Too bad it all fell apart so dramatically. If the buyers of those bonds in the 1870s only knew what would happen before 1955! I think I would need a lot more than 5% to invest in US 30 year Treasuries if I intended to hold them to maturity.
You don’t get it. A bond issued in 1875 and due in 1955, with a face value of 1,000 old marks in 1875 would still have a face value of 1,000 old marks in 1955, with a fixed rate of interest based on the old mark. But there were two episodes of hyperinflation in between 1875 and 1955, and two currency changes, and the original 1875 mark became worthless. So the bond’s face value was 1000 worthless old marks = worthless. Interest was x% of old worthless marks. That’s all a bondholder has a right to. Like I said, not even worth the paper it was printed on. They ended up in the trash.
I got it. I mentioned hyperinflation and noted “There are also the issues of changes in currency”. RTGDF reply I wrote (lol). Sure, 5% of nothing in 1955 is nothing. Most countries have had a pretty scary time of it from 1870 to 1955. The U.S. might be one of the few which has done pretty well (relatively) 1870 to 1955 and on to 2023. Perhaps another reason why the dollar is the world’s primary reserve currency.
Is this a secondary effect of Japan owning so much US debt? Is their future unsure because and risky because they are so exposed to our risky future? Financial noob asking.
It is mostly an effect of Japan monetizing massive deficit spending for decades, while simultaneously, the economy (i.e. tax base) has not grown.
Japan is now experiencing an “emperor has no clothes” moment where bond investors are realizing they actually DO need to charge a risk premium to lend to an unsustainably indebted government.
This may be a dumb question related to bond yields in the US. What if US simply says, “Hey this is what we can pay not a dime more, take your business elsewhere. We can buy our own bonds just like Japan”. We can print our own money and buy our bonds. If the rest of the world wants to buy, US cannot pay more yield. Simple
MASSIVE INFLATION, Argentina style to where the local currency (in our case the USD) becomes useless and in even in day-to-day contracts, such as leases, is replaced with another currency, though payments may still be done in local currency, but at that day’s exchange rate.
The yen has already plunged against the USD, and the BOJ has limited leeway now.
All sins eventually lead to inflation and currency.
Yep when I lived in Argentina in 2018 and leased a flat all villas and flats were quoted as fixed to the USD while there appliances doubled in a couple of weeks as I rushed out to buy appliances for the flat
Why isn’t Japan increasing the ST interest rate to fight inflation? Why are they using QT instead? It seems that QT is what could be causing the LT interest rate to blow out.
On the plus side: social fabric ok.
‘Human capital ok’ This term means, roughly, ability to trust others and work together. No mobs storming govt. Officials not arresting each other. Property crime almost nonexistent. Usually less than 10 gun murders per year. One not long ago had zero. A VERY safe place, especially appreciated by female tourists.
Could be worse.
Japanese hate immigrants, especially Asian immigrants. In homogenous societies like Japan (now) and Sweden (many years ago), crime will be low and the country will be very safe. However, with a birth rate far below replacement, Japan’s population is already declining.
That is changing. I saw many immigrants in Japan, especially from Vietnam and India.
It’s going to be a really bad year for credit spreads, as there a lot of repricing of risk starts emerging. For instance, many Asset Backed Securities were bundled assuming “high” credit scores of borrowers. Given that up to nine million people could have their credit scores reduced substantially due to student loan delinquency, all those ABS bundles will suddenly become sketchy. Furthermore, people not paying their student loan debt are no longer eligible for FHA mortgage loan workouts, so double whammy.
I look at it now as a long running Jenga game. Every bad policy is a block pulled underneath and piled on top. It’s very shaky and leaning now to the point of…
The best an economy is one on smooth upward trajectory. Somehow, all countries at some point insist on blowing a huge bubble on some asset. Once developed, at some point in the future it bursts creating an economic equivalent of a black hole. No amount of economic ‘magic’ QE etc. will stop the country from being captured by the black hole. How do bubbles form, it must be human behaviour, the madness of crowds.
Is there any way to find out how many Japanese Yen notes are in circulation? I seem to be unable to simply Google the total Yen in circulation like I can the USD.
The Japanese are (in?)famous for both their propensity to use cash, but also a tendency to hold onto paper notes directly instead of in bank accounts or investments. By reputation, there might well be a large volume of Yen held “under the tatami mat,” so to speak.
A 3-4% inflation rate, with rising interest rates, should get that paper cash to move from wherever it’s stored back into the banking system. That should pressure Japanese inflation higher as well.
Japan might be transforming from something “special”, to a “normal” country for the first time in decades. That’s not a bad thing.
The most stunning part is the 10yr – 40yr mismatch. I know it’s the BOJ suppressing the the 10yr, but it makes no sense. So inflation (already >3%) is no big deal the next 10 years but somehow kicks in after that??? Crazy.
Wolf, you mention the short-term / long-term carry trade. But why isn’t anybody locking in a long-term/longer-term 10yr/40yr carry trade? Seems to be huge guaranteed returns (assuming high leverage) for nearly a decade with minimal inflation risk (both sides respond similarly).
Do financial institutions have access to ultra-low 10yr borrowing? Or only the BOJ?
Super basic question.
I don’t understand why investors / funds buy anything that has a real rate of return that is negative.
I don’t have the best track record buying low, selling high, but this looks like a guaranteed loss.
Is it the least bad alternative?
Is there a hope that exchange rates will change and there will be a return when currency (investing from another country) is factored in?
Are they expecting deflation? (This seems unlikely given the huge debt)
Confused.
Central banks lead that charge or create that trade. As Wolf said they don’t care about the prices on their balance sheets. It’s pre cursor for pushing on a string. People lost fortunes over the years shorting JGB, maybe that trade has finally changed with sticky inflation.
People still hold money in Swiss banks, which had negative interest rates for a while. It’s benchmark interest rate is currently 0.25 percent. It is a security issue, people wanting a “safe” place to store their money, and are willing to pay for it.
We currently have 23 primary dealers here who are sort of forced to be buyers at our auction. In Japan they have JGB Market Special Participants. Some examples include:
Nomura Securities Co., Ltd.
Daiwa Securities Co. Ltd.
Mizuho Securities Co., Ltd.
Mitsubishi UFJ Morgan Stanley Securities Co., Ltd.
Goldman Sachs Japan Co., Ltd.
JPMorgan Securities Japan Co., Ltd.
Citigroup Global Markets Japan Inc.
Deutsche Securities Inc.
SMBC Nikko Securities I
Wolf are the above banks under the same obligation to be buyers of JGB like our primary dealers?
Thanks
Oh. Interesting. That’s a helpful start. This why there is a low percentage of private buyers in Japan. They aren’t forced to. Thank you.
Buying at auction and then reselling the bonds is a big and profitable business for broker-dealers. And they eagerly do it, and only a relatively small number, as you point out, are approved to participate in it. So one of the requirements is that the approved broker-dealers cannot sit out auctions or lowball bids. So if a broker-dealer wants to keep access to the auction, they have to bid at the auctions. That makes sense: with the privilege come requirements.
In Germany, they have a different system. It’s the Bundesbank that sells the bonds for the government. Only members of the Bund Issues Auction Group are allowed to bid. If not all bonds sell (“failed” bond auction), rather than hiking the offered yield, the Bundesbank retains the unsold bonds and later sells them in bits and pieces in the secondary market.
All these methods are trying to obtain the lowest possible yield = interest expense for the government. No one really cares about the investors. I think the US system is reasonably fair to investors, compared to the German system. But the German system does allow for the German yield to be very low (aka “unattractive”).
Note that the yields in the article are NOT auction yields, but yields in the secondary market. There was a 20-year auction on Tuesday where the yield was high, and it then also bled into the secondary market, or vice verse, the auction yield was high because of the secondary market turmoil. So price discovery is taking place, even at the auctions.
Thank you! Very helpful.
Going off on a tangent here in Wisconsin. I just had a call from my Credit Union about my CD’s. They are offering 4.55% on 8 month, and 4 % on one year CD’s. Nothing about a longer term was mentioned. I will probably go with the 8 Month rate.
Just to toss in my 2¢ in here. The USA does not have a spending problem. It has a revenue collecting problem. When Billionaires are spending $500 million to buy a yacht (and borrowing against their inflated stocks to do so), we have a problem.
Yes and no. The US does have a spending problem in that our spending is very inefficient such as forever wars, inefficient jobs programs, subsidies, green grants, etc. if people actually trusted DC to spend taxes responsibly then raising taxes wouldn’t be as big of a deal. My local government extended a bunch of sales taxes and I’m okay with it because they spend on some great things and do so effectively.
If our tax rates go up, then what is it for? Another war? Another bailout? Rural Internet that doesn’t get built? An infrastructure bill where the projects take 10 years to build because of red tape?
Federal spending increased literally 40% between 2019 and 2025. I know I am a broken record on this, but we have an out of control bipartisan spending problem. It must be addressed.
If we confiscated every dollar from every American billionaire we could run the country for seven years. Then what?
I think there is pain in the US future for sure but I also think deregulation, lower energy production costs, more vocational training (this is already happening), can certainly help main street absorb the fuckery from Wall Street and DC.
The US is still a very diverse economy and has overcome plenty of economic weirdness and hardship in the past. Anyone wishcasting our demise that lives here is kinda weird. China has its own problems as well.
Here is how it is, Eric. I am not on your team. You are not on my team. The US is divided into two teams who absolutely despise and loathe each other. Each team does not care about winning. They just want to see the other team lose.
Well my original comment was deleted but this is a horrible take. If that is your conclusion from everything then you are a lost soul. Good luck.
Your team did amazing the last 4 years
Again I have no clue what is so bad about my statement above
Dude we are all on Team America. And not just in the South Park sense. I certainly don’t hate people who disagree with me politically and the major parties don’t fit completely with what I believe anyway. And there is so much more to life than politics. I have family and friends on all sides of the political spectrum and it makes my life richer and better.
Eric86. PE is not going to fix the potholes in the streets, or clear away the rubble in slum areas to make way for new stuff. Privatization of health care (insurance) in the USA has made a mess of it. Banking has been deregulated to the extend that something like 80% of all bank lending is directed towards buying existing assets like housing (and that drives up the price). The way higher education is done (financed) also drives up the cost and loads students with debt.
All of the above loads the average working person with bills and debts that they don’t have in other industrial countries. This means they must earn higher wages to pay all these bills, and that makes the USA less competitive with other countries.
Never said PE will fix those problems but government already sucks at fixing those problems and it isn’t a funding issue. Potholes are local. My local government is great at it. Government needs to work on its trust especially the feds. How much of our money went into forever wars or useless programs? Or insane defense spending?
I agree with you on higher education. That is also a government caused problem. As I said in my original post, kids are starting to get vocational training in high school more and more. The WSJ had a great article about it. It is going to take a while for those things to bear fruit but it is a positive thing.
University is expensive because government loans subsidize it. Housing is expensive because our Fed decided to hold mortgage rates lower than market rate and, what do you know, a bubble formed, and as far as mortgage lending goes, private banks are a minor player, government lenders are the problem.
Regarding your infrastructure, states can’t do what they did in the 50s, building trains and roads and bridges, because literally half their budget is Medicaid. There is no free money fountain, entitlement programs are the reason state level infrastructure is declining.
Healthcare is trickier, there is massive government capture, about half of healthcare is government paid, that drives up costs for private payers, but it is a sector that market forces are ill equipped to solve generally. I don’t know what would be best. Government involvement in healthcare has both good and bad consequences, good because people are covered, bad because there are all kinds of misallocations of resources because some things are undervalued and some overvalued because there is no market mechanism. I’ve got 30+ years of experience in healthcare and there are major problems, but the ideal solution probably involves more charitable care in addition to market and private, like we used to have prior to Medicare and Medicaid, there is a place for charity and not for profit care that has been pushed aside as the poor receive an entitlement and often behave as if entitled.
Anyway, long way to say, I don’t know all answers, but if you think the private sector is the issue plaguing all these sectors, I think you need a clearer eye
“But the BOJ still holds 52% of all JGBs, and paper losses (or actual losses) don’t matter to a central bank”
I get that your statement is true in both theory and practice. But somehow it seems that this just represents the place where national losses come to disappear into the address of a null pointer.
Like a black hole singularity where all the rules of accounting break down. But at the same time (I am told) there are fewer places more dangerous in the universe than at the event horizon of a black hole.
Seems like a marvelous place and time to discover unintended consequences.
I’m curious about this circular relationship also.
I have heard of it… but not really thought it out?
I now curious about the quantity of foreign holders of yen, and the physical domestic supply too (based on above comments).
Unfortunately, this government debt problem is not unique to Japan. Let’s not forget that U.S. 30-year bonds cratered in a similar spectacular fashion a few years ago, and U.S. 30-year bonds look poised to drop some more. The U.S. is a leader it seems.
I don’t think there is a point in US history ever where 30 year bonds did what they just did in Japan this month.