Super Abenomics: Japan’s Nikkei Crashes on Rioting Japanese Government Bonds

Just a few days ago, I posted the Economist magazine’s seeming worship of “Abenomics” which featured PM Shinzo Azi as a Superhero.

Sometimes magazine covers can be useful indicators of extreme sentiments or the bandwagon effect via the stages of mania or depression or of crowded trades. Occasionally they serve as key harbingers to major inflection points.

I am not sure if today’s JGB incident represents a major reversal that should usher in a risk off condition, but I am sure that this serves as my alarm bell.

Well, a riot in Japan’s Governments Bonds has sent the Yen in a spike and simultaneously a crash in her stock markets. The Nikkei dived by 7.3%!

First the upheaval in the JGBs.

From the Bloomberg:

Japanese government bonds fell, with 10-year rates touching 1 percent for the first time in a year, on speculation the Federal Reserve will curb stimulus and the Bank of Japan will tolerate an increase in yields.

Japan’s five-year note rate matched the highest in two years after Fed Chairman Ben S. Bernanke said yesterday the central bank may trim bond purchases if policy makers see indications of sustained economic growth. The BOJ injected 2 trillion yen ($19.4 billion) into the financial system to stem volatility following a circuit breaker in JGB futures trading.

The reality is that this has little to do with Ben Bernanke’s latest statement but has everything do with the much touted elixir called “Abenomics”. 

The Bloomberg chart of JGB’s 10 year yield has been climbing since the BoJ’s Kuroda announcement to double her monetary base last April. In other words, the yields has remained lofty even when Japan’s government has tried to calm her down by buying them. 

Today the BoJ bought a record number of yields in an attempt to assuage the markets, from another Bloomberg article:

The Bank of Japan injected 2 trillion yen ($19.4 billion) into the financial system today to stem volatility, as benchmark JGB yields swayed the most since the day after the central bank announced unprecedented bond buying.

The following table form Bloomberg, shows of the surge across the spectrum of the yields of Japan’s bonds, in a month’s period. This comes with the exception the 2 year yield.

I keep repeating that Abenomics is bound for failure for the simple reason that such policies have been founded on economic inconsistencies and premised on hope on the supposed magic of doing the same thing over and over again and expecting different results:

Abenomics operates in an incorrigible self-contradiction: Abenomics has been designed to produce substantial price inflation but expects interest rates at permanently zero bound. Such two variables are like polar opposites. Thus expectations for their harmonious combination are founded on whims rather from economic reality.

Next the Japan’s stock market crash has sent almost the entire Asian region in a sea of red as shown by the table above from Bloomberg, both the Nikkei and the Topix were down 7.32% and 6.87% respectively .

Here is the Bloomberg:

Japan’s Topix index tumbled almost 7 percent, the most since the aftermath of the March 2011 tsunami and nuclear disaster, as financial companies plunged amid rising bond yields. The rout triggered a halt in Nikkei 225 Stock Average futures trading in Osaka.

Consumer lenders lost 11 percent to lead declines among the Topix (TPX)’s 33 industries. Mitsubishi Estate Co., the country’s biggest developer, slid 9.3 percent. Mitsubishi Motor Corp. dropped 14 percent, falling a second day after advancing more than 50 percent in the previous three days. Tokyo Electric Power Co. plunged 13 percent.

And given the stock market’s latest near vertical ascent, the ensuing crash simply accounts as “every action has an equal and opposite reaction”, from the same article:

A measure of share swings surged to its highest in two years. The Topix’s 50-day volatility rose to 28.8, the highest since May 2011, according to data compiled by Bloomberg.

The Topix and Nikkei 225 Stock Average have risen more than 40 percent this year, outperforming all major equity indexes amid unprecedented Bank of Japan easing. The Topix trades at about 1.4 times book value, compared with about 2.5 for the Standard & Poor’s 500 Index and 1.7 for the Stoxx Europe 600 Index.

The coming sessions will be very crucial.

It isn’t the yen or Japan’s stock markets that will be the primary concern rather it is the JGB or Japan’s bond markets that will act as the driving force.

The bond markets has been in a parallel universe or in patent disconnect with the stock markets, where we just saw today the realization of a Wile E Coyote moment.

Previous soaring stock markets amidst unstable bond markets has finally led to a regression to the mean. As today has shown, stock markets are the last to know.

Yet if the BoJ will not be able to tame the bond markets in the coming sessions, despite her intensifying purchases, this increases the risks of a Japan debt crisis, as explained before.

Japan’s debt crisis may come sooner than later.  And today may just be a teaser.

The increasing prospects of a Japan debt crisis could herald a return of a global RISK OFF conditions.

On the other hand, if the BOJ continues to massively inflate; such crisis may metastasize into a currency or a yen crisis or a combo of both.

Everything now will depend on the how Japanese policymakers react and how the global financial markets will respond to them. Remember this isn’t just a Japan affair, but given the immense build up of global bubbles, including the Philippines, all it needs is a trigger for all of them to pop. Japan could play such a role.

Today’s rout in the Japanese financial markets is a taste of the blowback from populist unsustainable inflationist policies.