JGB Watch: BoJ Unfazed by Rising Yields?

Back to my JGB-Japan debt crisis watch.

Yields of 10 and 30 year Japanese Government Bonds (JGB) have been trading higher today.

30 year GB yields has been climbing during the past 3 days.

The same holds true for 10 year JGB yields.

Previously such levels would have sent Japan’s equity markets in a panic. But perhaps market participants may have become jaded to this. 

The Nikkei closed today marginally lower despite a substantial rise in JGB yields.

Or perhaps the markets have fallen into mainstream media’s magical spell. This article, for instance, suggests that current yield levels “tell you just why the central bank isn't panicking yet.”

But as exhibited by the above chart, yields of the 10 year JGBs appear to be building an upside momentum (blue arrow), since the BoJ’s announcement of the program to double Japan’s monetary base in 2 years.

Importantly, real events point to higher yields/ interest rates.

From Reuters:

Japan's home buyers are rushing for fixed-rate mortgages to lock in on what they consider rock-bottom rates, in a sign of early victory for the central bank as it attempts to reflate the world's third-largest economy with a burst of monetary stimulus.

The bold monetary expansion which aims to achieve 2 percent inflation in less than two years has sparked a rise in bond yields and fanned worries among home owners that interest rates are set to rise sooner or later.

Fierce competition for banks is only likely to intensify at the expense of profit margins, analysts and bankers say, as mortgage lending is one of the few areas of growth amid prolonged weakness in corporate loan demand.

Taking advantage of historically low rates thanks to years of ultra-easy monetary policy, roughly nine out of 10 people in recent years took out floating-rate mortgages.

Notice the oxymoron?

The article says that this represents “a sign of early victory for the central bank as it attempts to reflate”. But this has “fanned worries among home owners that interest rates are set to rise sooner or later”. However, BoJ’s Kuroda confidently thinks that JGBs “will eventually regain stability”

Essentially, perceptions and actions of Japanese home buyers in expectations of higher interest rates will challenge BoJ Kuroda’s expectations of JGBs regaining stability.

Unfortunately too, whatever statistical “domestic demand” economic gains that has buoyed Abenomics appear as being offset by sluggish business or capital spending.

From another Reuters article:

Japan's core machinery orders fell in April from the previous month, down for the first time in three months as companies remain hesitant to boost capital spending despite Prime Minister Shinzo Abe's sweeping stimulus policies.

Cabinet Office data showed core machinery orders, a highly volatile series regarded as a leading indicator of capital spending, fell 8.8 percent, compared with a 8.5 percent decline in a Reuters poll of analysts.

Policymakers and the mainstream fail to realize that inflationism skewers the coordinative functions of economic calculations. How would an investor or entrepreneur invest in an environment of unstable prices and where profitability is uncertain?  

Without capex growth, how will demand be funded, except by depleting on current savings and or by borrowing, all of which will prove to be temporary and unsustainable?

And considering the growing risks of a bank deposit haircuts, the likelihood is that Japanese savers will seek safety in overseas assets.

Again Abenomics has been pillared on a self-contradictory expectations of igniting inflation in an environment of “stable” interest rates. These forces are simply incompatible.

Given the upside breakout of US treasury yields and the recent collapse of EM risks assets (stocks, bonds and currencies), “not panicking” may transition into a “horror show”.