Japan’s bond market is in free fall… Prices for the once-stable 30-year Japanese government bond have plunged 20%. And yields (which move in the opposite direction to prices) on 20-year and 30-year JGBs (Japanese Government Bonds) are nearing all-time highs as a result. Crashing bond prices (and soaring yields) like this aren’t normal, as it signals something has gone terribly wrong. So, what is going on? And what does it mean for you as an investor?
Japan’s lost decade…
Prices for the once-stable 30-year Japanese government bond have plunged 20%. And yields (which move in the opposite direction to prices) on 20-year and 30-year JGBs (Japanese Government Bonds) are nearing all-time highs as a result.
Crashing bond prices (and soaring yields) like this aren’t normal, as it signals something has gone terribly wrong.
So, what is going on in the bond market? And what does it mean for you as an investor?
In the beginning of 1990, Japan experienced an asset bubble collapse. This kicked off what is known as the “Lost Decades”.
Japan did what most other countries do when the markets crash. It borrowed vast sums of money and spent it on “stimulus”….
Business subsidies, cash handouts, massive infrastructure projects…you name it.
However, Japan spent trillions of yen it didn’t have. Budget deficits soared and so did Japan’s debt – now roughly 250% of GDP – the highest in the world.
To finance it all, the Bank of Japan (BoJ) dropped rates to zero (even below zero). It also pioneered quantitative easing (QE) – when a central bank creates money out of thin air to buy its own government’s bonds.
So, the BoJ accumulated virtually the entire supply of government bonds by way of QE. And they got away with it for nearly three decades, because inflation remained low.
That all changed in 2021 when inflation started moving higher.
Suddenly, the BoJ was left with spending money it didn’t have by buying its bonds risks and as a result further stoking inflation and devaluing the yen.
And that’s exactly what happened. Japan’s inflation is much higher than the US today. As a result, the market is repricing Japanese bonds, and it’s not pretty.
500% increase in 30-year yields since 2020
The 30-year JGB currently yields just over 3%. While the 30-year US Treasury bond yields just over 5%. So, on the surface, Japanese bond yields seem low.
However, the difference is Japan has had absurdly low interest rates for decades. In fact, just five years ago, the 30-year JGB yielded just under 0.5%.
That’s a 500% increase in just five years!
Remember, higher yields mean falling prices and vice versa. So, as JGB yield soared, prices plummeted. Now, Japan’s government (as the largest holder of JGB) is holding the bag.
The problem is no rational person would be comfortable lending money for 30 years to a country with Japan’s debt levels (and rising inflation). That means, yields could continue to rise ultimately triggering a Japanese debt crisis.
Financial contagion has a habit of crossing borders…
The immediate risk is Japan’s instability spills across its borders and affects the rest of the globe.
Consider that Japan is one of the largest holders of US treasuries. If Japan decides to sell some US treasuries to support its own market, then US yields will rise.
Higher US yields mean the cost of capital increases putting strain on consumers, businesses and ultimately, the economy and stocks.
Even worse, Japan’s bond market crisis could trigger a debt crisis in the US. After all, America’s +$36 trillion in debt with over $1 trillion going towards serving this debt.
So, what’s going on right now in Japan is another risk to global economic stability. As investors, we need to pay attention and act accordingly.
The best way to protect your wealth is by owning hedges such as gold, silver and even bitcoin. To learn more about these options, join my South African investor community.
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