Mud Slide
November 25, 2024
How the Bank of Japan has acted post US election.
Almost three weeks ago Donald Trump was elected President of the United States. Unsurprisingly, global markets reacted. Would they have reacted differently had Harris won? Hard to say.
It is undebatable that JGB yields have slide back into the brown zone – a confusing place that none of us want to be – did someone shit the bed or is it just a bad smell? Hard to say.
Bitcoin, US stocks and the US Dollar rallied hard on news of Trump’s victory, while precious metals and US Treasuries dropped. There are a lot of people writing about these things.
Japanese government bonds (JGBs) fell along with their US counterparts. Fewer people have focused on this. 10-year JGB yields are pushing 1.10%, a level that was rejected earlier this summer, and last seen before then over 10 years ago.
The context goes like this:
- The BOJ is flexibly capping 10-year JGB yields at 1.0%
- The BOJ, pensions, and retirement accounts buy a lot of JGBs (because they have to)
- As yields go up, these institutions suffer unrealized losses
- The Yen is really weak and causing social issues in Japan
Lets tackle the bullets in reverse order (some matrix shit).
A weak Yen is no good because Japan imports a ton of energy and raw materials – when this stuff gets expensive, people get unhappy and businesses get less profitable. Higher bonds yields are often a solution to this issue, but haven’t been so far.
Yields going up is tough for those holding lots of JGBs because they lose money. No one believes that the rate the government gives you on a bond actually matches inflation. Plus there is the whole issue of your assets not matching liabilities when the mark-to-market value of your assets drops a lot. Probably not a big issue as the BOJ, MOF, and Gov. won’t require these big holders of JGBs to mark-to-market, and if their is an issue, they will bail them out, or else Japan becomes a developing country again. (This was bullets 2 & 3)
As far the flexible cap at 1%… the move to ‘nimble’ operations (can a bureaucracy be nimble?) in Oct. 2023 has only been tested once so far. That test came during the summer of ’24 when yields repeatedly tapped 1.10%, and the bank was able to keep its cool. There was no emergency buying op, and yields retreated ~30% for much of the late summer/ fall. Yet, here we are again. How nimble will the BOJ be? How flexible is this 1.0% level?
If the Trump administration is going to be pro-US, we PRObably will get a weak Dollar. This will allow fuel corporate exports along with a myriad of other things. Read all about it. Regardless of the reasons for devaluing the Dollar, we most likely are headed toward an era of higher bond yields. It really makes no sense to lend the government money for 10-years at a fixed rate of 5% when the government is running a 7% fiscal deficit with bi-partisan support.
As the US goes, so do the allies. Japan will walk into an era of higher government bond yields as well – but the question is will they go with the flow, or start gobbling up JGBs like Joey Chesnut reincarnate?
Of course, let’s end the piece with some data from the most recent BOJ JGB holding report. Chart 1 is showing the BOJ’s total 10-year JGB holdings by report, and Chart 2 is showing the BOJ’s change in 10-year JGB holdings by report.
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