May 21, 2025

 

(JAPANESE LONG RATES:  A RIPPLE THAT COULD BECOME A GIANT WAVE)

 

May 21, 2025

Hello everyone

For many years, the Bank of Japan (BoJ) has set its 10-year government bond yield near zero through relentless buying.  The upshot of this is that it owns over half of all Japanese Government Bonds (worth around $8.8 trillion). 

So, what’s happening now…

This yield curve control policy has now begun to fall apart.  Long bond yields are spiking, suggesting the BoJ is losing its grip on the far end of the curve.

 

The BoJ is in an uncomfortable situation.

Japan’s government debt sits at over 260% of GDP…

If they raise rates, that could tip the economy into recession.

If they keep rates low, that could risk inflation spiralling out of control.

Is this a big deal…?

As long rates rise, Japanese institutional investors are increasingly incentivised to repatriate capital, taking advantage of more attractive domestic yields.

That is a problem for global markets:  Japan is the largest foreign holder of U.S. Treasuries (~$1.1 trillion).  If they start selling, U.S. long-term yields could move significantly higher, setting off a feedback loop that tightens global financial conditions.

Should yields continue to surge, Japan may be forced to unwind foreign asset holdings to defend its domestic markets and currency – causing ripple effects across the USD, U.S. bond yields, and global risk assets.

We cannot just say this is a yield spike and turn the page.  This is a warning from the second-largest holder of U.S. debt, with the backdrop of the world’s most indebted developed economy facing a demographic implosion. 

Japan’s path is unsustainable.

Stop.  Listen to the eerie silence coming from the bond desks. 

Something is shifting on a deeper level.

 

QI CORNER

 

 

 

 

Cheers

Jacquie