All monetary sins ultimately lead to the currency. There are no miracle exits for the BOJ.
By Wolf Richter for WOLF STREET.
The 10-year Japanese Government Bond yield rose to 3.02% today, the highest since August 1996, just about exactly 30 years ago.
But Japan’s bond market “rout” – and more broadly, the global bond market rout – isn’t so much of a rout, though rising yields mean falling bond prices, as it is the bond market slowly coming back to life after two decades of central-bank engineered financial repression that has led to numerous problems and distortions, including the worst inflation in four decades. And in Japan, on the forefront of this financial repression, it also led to the collapse of the yen.
From mid-2016 through mid-2021, the 10-year JGB yield traded at slightly negative yields to slightly positive yields, an absurdity that the Bank of Japan engineered with its Yield-Curve Control (YCC), which is a specific form of QE. But then reality hit: To deal with soaring inflation and the collapsing yen, the BOJ was forced to abandon YCC and QE and veer into the opposite direction: rate hikes and QT. This has allowed the Japanese bond market to rise from the grave. That’s what we’re looking at here.
Japan’s CPI inflation was at 1.9% in July, accelerating from June and May, after the plunge in energy costs had pushed it down earlier this year. In terms of July inflation, the “real” yield (yield minus inflation) of 10-year JGB maturities is only 1.1%. Last fall, with CPI inflation at 3.0%, the “real” 10-year JGB yield was still negative! So in those terms, the 10-year yield is still very low.
The 10-year yield is also low, considering the problematic fiscal situation of Japan, and its huge mountain of government debt, measuring roughly 248% of GDP (twice the US debt-to-GDP ratio).
Japan’s credit rating at Fitch (A) is five notches below AAA, and at S&P (A+) and Moody’s (A1) is four notches below (my cheat sheet of bond credit ratings by ratings agency).
So if anything, it’s amazing that the 10-year JGB yield is still this low. It should be substantially higher.
The reason it is still this low is that the BOJ still sits on a gigantic pile of JGBs, and its huge balance sheet still weighs heavily on the bond market though the BOJ has been doing QT for over two years:
The 30-year JGB yield dipped to 4.18% today after having risen to 4.19% yesterday, the highest since the 30-year bond was introduced in 1999.
This marks the completion of the seventh year of Japan’s bond bear market which started at the end of August 2019, when the 30-year yield bottomed out at +0.12% and the 10-year yield was negative -0.29% (by contrast, in the US the bond bear market, which started in late August 2020, just completed its sixth year).
Trying to halt the collapse of the yen.
YCC to contain long-term yields is now totally off the table as the collapse of the yen and inflation are forcing the BOJ to do the opposite: rate hikes and QT. All monetary sins lead to the currency. There is no miracle exit. What is needed to stabilize the yen is much more QT and substantially higher policy rates.
The yen declined to ¥160 to $1 yesterday, and today rose to ¥159 on renewed intervention chatter.
On July 31, a Friday, with the USD/JPY at 164, the US and Japan conducted a historic joint intervention, with the US selling an undisclosed amount of euros (not dollars) and buying yen; and with Japan selling a record $97 billion of USD for yen.
The collapse of the currency of the fourth-largest economy in the world is nothing to be trifled with.
The reason Bessent got the US involved in this intervention was to prevent the problems in Japan from bleeding over into the US Treasury market.
What would normally happen is that in preparation for the next intervention, Japan’s authorities would dump some Treasury holdings to get the USD cash, and then use that cash to buy yen. But Japan’s shedding US Treasuries was a factor in pushing up Treasury yields. With this joint intervention, Bessent tried to temporarily slow the rise of the Treasury yields. This succeeded temporarily, for a few days, but two weeks later, long-term Treasury yields were higher than they’d been before the joint intervention.
In terms of Japan, the collapse of the yen has led to the wrong kind of consumer price inflation, not nurtured by rapidly growing demand and salaries, but fueled by soaring import prices of fuels, foods, consumer products, components, supplies, and materials – despite massive government subsidies at the wholesale level to contain those effects – as it takes a lot more of these collapsed yen to buy the same products. It’s the collapse of the yen that the BOJ has been forced to react to.
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Japan has dug itself into a deep hole. Will take years if not decades of pain to recover, and with shifting international tides to maneuver, it looks very dire.
Seems like with those yields Japanese investors will seek Japan bond markets and avoid exchange rate risk.
Unlikely for Japan to unload significantly the US Treasury but unlikely it will increase. Seems like without US changes only place for US yields is to go up.
I’m not so sure that it is unlikely. The Nikkei has been sliding for three days straight. What other short-term option would be left for the Japanese to save the Yen, other than to unload US Treasuries?
“Unlikely for Japan to unload significantly the US Treasury”
Really??
In 2022 Hocus Pocus 2 came out.
In 2026…
😂
Wi Tu Lo.
Sum Ting Wong.
Hyperbole by Wolf: All monetary sins ultimately lead to the currency. There are no miracle exits for the BOJ.
Question for Wolf: Are there any miracle exits for USA?
No miracle exit. The officially chosen exit is “letting it run hot” – meaning higher nominal economic growth (+8.0% in Q2), higher inflation (3-5%), and higher yields. We’ve been talking about it here for a while.
Don’t worry, AI will make us so productive that that won’t have to work. It’s a win, win.
Policy makers are ignoring the big elephant in the room which is massive and exponentially increasing debt.
Eventually that problem will have to be dealt with and I don’t agree with Bessent that we can “grow our way out of it”. At least right now, the truth is very much to the contrary – federally it has increased by over 10T in only a few years !
“Letting it run hot” is a functional way of reducing the burden of the debt (nominal economic growth exceeds growth of the debt). And everyone, including asset holders, pays for it through higher inflation.
We have had several years of this strategy.
Hows it working out so far? Has the debt to gdp, meaningfully declined? Or has it stabilized. And interest rates are still climbing and working there way into the budget.
Without fiscal discipline, is this a 30 year or 100 year initiative?
This is one thing I haven’t heard them talk about.
“Were gonna let it run hot” begs the question “how longs this gonna take”. Any estimates?
I was thinking the same thing.. For how long? What if there’s another black swan event. All plans are great in the average case.
What we need are some massive tax cuts for the wealthy.
Wolf
You were / are one of the very few to make this point . In Aug 2020 long term interest rates were at lows that required long term DEFLATION to break even on a real basis .
But what of the promise from the Fed of a 2% inflation target?
They will need that to keep inflation in the 3-5% range, where is has been for the past few years. If they say the inflation target is 4%, they’ll get 5%+ inflation. And that could get problematic.
“The officially chosen exit is “letting it run hot” – meaning higher nominal economic growth (+8.0% in Q2)”
Just to clarify, does “economic growth” mean more and bigger loans? Basically, new currency creation from nothing, paid in the collateral of promises for future repayment?
It’s investment that triggers growth. And these investments are invested capital. There are only two types of capital: debt capital and equity capital. Investors expect to make money off their investments, debt or equity, now as ever, though it’s risky and doesn’t always work out.
Somewhere, Paul Krugman is telling himself, “the problems facing Japan’s monetary wizards has nothing to do with me.”
–Geezer
What’s happening with the Dollar-Yen carry trade, and how is it affecting dollar-yen spreads?
Question is, is it time to head towards the exit. I’m thinking it is.
If and when bond yields rise enough (they’re still far from it), it’ll be time to head for the ENTRANCE to the bond market, not the exit.
The time to exit the Japanese bond market was in Aug 2019. And the time to exit the US bond market was in Aug 2020. That when their bull markets ended.
I’m looking at the stock market exit door.
A couple of quotes I remember from a movie titled “Margin Call” that might be worth watching (or re-watching):
“Sell it all. Today.”
“If you’re the first out the door, that’s not called panicking.”
I realize this is a bit off topic, but I would be interested to know what you (Wolf) think will be the peak 10y/30y yields in the next 2-3 years. And, at which point do you think ENTRANCE to the bond market makes sense? I know, I know no one has a crystal ball and this is just a discussion for fun, but I really respect your opinion (I donate!) so I’d like to hear it. If you want to put this in a different article, of course that’s fine.
Personally, I’d be very tempted to sell equities and buy bonds if yields on long-dated TIPS exceeded 4%.
A lot of this probably depends upon your goals and time horizon.
The market interventions are not working anymore.
Oil is ripping because no one believes that peace negotiations are going well, inflation is up and expected to rip because diesel & food is ripping with no end in sight and inventory/reverses are getting exhausted, bond yields are ripping because inflation is expected to rip, and so on.
But the great fear is with a CAPE in the nosebleeds domestically and certain countries, the bubble may pop. What usually is associated with a pop in a capex bubble? Rising bond yields.
Of course no one can time the market. But it may be an unwise bet to go too deep into expensive equities in these conditins. Bonds will bleed you too on the interest rate risk, and cash with a fed that let the bond market take the wheel instead of raising the fed rate is not that attractive in a higher inflationary environment.
Place your bets!
“Bonds will bleed you too on the interest rate risk…”
A little too broad a brush. Placing some chips on TIPS and I-bonds. Moving risk from interest rates onto CPI corruption but nothing is risk free.
I don’t believe this is the time to catch a falling knife in the US or Japan’s Bond market. The forty year bull market in American bonds ended in 2020. Today, the US stock market is really the only game in town for capital appreciation, and will be until the long bond yield forces dramatic cuts in government spending, which will tank an economy that was living a recession proof lie built on borrowing. It’s gonna be a haircut for sure.
Me think, me and my friend Engles have asked the same questions.
1. Why dont you let run the inflation hot for a while?
2. May be we can “dig out of the hole” this way.
3. If rates raises, let them be, BOJ, FED or BOE, can raise the rates and still be relevant.
4. The private market, bonds, companies can have investors ready to pay for tulips, south sea ships, railroads, steamships, electronics, computers, houses, crypto and AI.
5. Let it run. Lassie Fair.
6. Am I wrong somewhere?
I think I posted this comment before here.
1. Japan became a very good nation by science and technology, they understood science better than Europeans.
2. The problem is Japan is extremely financialized now, moving away from science.
3. Japanese cars will rival that of Europeans way ahead of big 3s. Nissan Datsun was a feared car all over the world.
4. Japanse electronics were way ahead of time. Sony digital, electronics, TV, walkman, but they missed out on computers.
5. They missed the entire dot comm bubbbb
6. Toyota, Hundai do not have full electric cars. America had electric cars designed by the original Tesla and Edison back in 1912. Now Korean makes cheaper/better cars.
7. Japanase were very good with animation. Do you remember those 90s tv animations made by Japanese? Somehow now again they lost the game.
8. Think about the video games like that that little thingy, jumpy, jumpy, side side…they lost that too..
9. Also, Japanese people dont make babies no more. All Japanese babies are now lower number babies.
8. Akira Kurasova, Bonsai tree, Puffer fish, bullet trains, osaka, cat was arrested for stealing fish,
9.Only thing no one can beat Japanse. Shops without shop keepers. Imagine that in B’more. LOL. ROFL.
Everything is scripted reality…a scripted reality is profitable and extracts capital…limiting chance…every panic already had a solution…nothing was unknown…they use central casting like McDonald’s boy…this was all decided long ago….control the narrative, the definitions, control the people…
Japan has a population issue also that’s crashing…but their cities are clean and culture is better than the USA,s which is now a shell of what it was…mind control tv programming and horrible public schools and tribalism group thinks has destroyed their ability to see how abnormal 2 trillion deficits are…blame the design as it was there to be gamed by the secret societies who own this empire…
Anyone recall the BOJ under the guidance of Paul Krugman and others…..going to the throne of ZIRP?
around 2000
ZIRP ….and why not?
Well its pay up time and the geniuses who do the plate spinning and holding the beach balls under water have a problem.
Japan first as they were first to implement.
Next the followers………the EU and the US.
The main question I have is: why the delay? Real JGB yields went negative in 2014, 12 years ago! If negative real yields lead to inflation and/or currency weakening, why did it take 12 years?
Good question. Everyone got away with it far longer than I thought they would. But then suddenly… And that’s how a lot of things are. No real problem for an amazingly long time, during which everyone learns the wrong lesson, and then suddenly…
“Bessent tried to temporarily slow the rise of the Treasury yields. This succeeded temporarily, for a few days, but two weeks later, long-term Treasury yields were higher than they’d been before the joint intervention.”
I’m just amazed that Bessent thought this would work out any better than it did. I guess that’s why you call it Hocus Pocus.
Wolf, you admit it clearly, but smoothly in the comment section – maybe in the article too, but I didn’t RT*DFA – that dollar holders are gonna get burned/shafted through inflation.
Applause and kudos to you for revealing the screw job.
In an ideal scenario of letting it run hot, salaries are going to rise with or faster than inflation, or else the economy cannot run hot; it will need the spending power of those salaries, so they need to grow fast. The goal for investors will be to find assets whose yields are higher than inflation, or whose capital gains are higher. But that will be tough for many assets, such as real estate, which will be handicapped by higher interest rates and rapidly rising costs.