Lucky to Be Alive

Just when we thought we’d seen it all the impossible happened.  Earlier this week the 10-year Japanese government bond yield slipped into negative territory. Obviously, it took decades of heavy handed intervention in the credit markets to pull off such a feat.


321125-samurai-movies-harakiri-wallpaperAfter carefully considering its options, the BoJ decides to do the Japanese thing…

Image credit: Masaki Kobayashi


On Tuesday, when the Nikkei dropped over 5 percent, the yield on Japan’s 10-year government bond dropped to minus 0.005 percent.  This marked the first time in the history of government debt that the yield on a G7 country’s 10-year bond has declined to less than zero.  We are lucky to be alive to bear witness to the absurdity.


1-JGB price chartFront-month JGB future, weekly, over the past 5 years. JGB yields briefly dipped to less than zero this week – click to enlarge.


Just a few years ago these depressed credit prices would have been considered impossible.  Why would anyone with advance knowledge of a negative outcome lend out their money at a loss?  But sure enough, in the bright light of day, the impossible has become reality.

Make of it what you will.  The ultimate impact of a 10-year government bond with a negative yield is unknown…though something seems amiss.  Will this allow the government to issue, and also buy up, unlimited amounts of its own debt?

Quite frankly, aside from the notion that bond holders will pay a fee for the privilege of loaning money to the Japanese government for a decade, we really don’t know the implications.  Still, we can offer some reflections.


2-NikkeiThe bull market in Japanese stocks has suffered a case of sudden death – click to enlarge.


The Beatings Will Continue

If you recall, Prime Minister Shinzo Abe, whose brainchild is Abenomics and Haruhiko Kuroda, the governor of the Bank of Japan, have pursued a reckless policy to boost exports by trashing the currency.  A weak yen, it was thought, would give Japan a competitive advantage and allow it to somehow export its way to wealth.

Maybe we’re a bit dim, but for the life of us, we can’t quite seem to understand the logic. How does robbing the savings of a country’s citizens make the country wealthy? By our estimation devaluing one’s currency, like giving a Hell’s Angels biker the middle finger, is asking for all kinds of trouble.


abe, kurodaJapan’s economic brain trust – Shinzo Abe and Haruhiko Kuroda. Money printing and deficit spending have failed to bring Japan’s economy out of its funk for 26 years running. These two have concluded that what is therefore needed is even more money printing and deficit spending.

Photo credit: Kiyoshi Ota / Bloomberg


The brief pleasure it may bring will quickly be overcome by regret when getting one’s face beat to pulp.  That’s when the brief pleasure turns into long term pain.  Alas, the act of angering a big bad biker – cannot easily be undone.  Abe’s currency debasement actions are well past the point of no return too.  The associated effects are now pummeling his country in the face.

What’s more, the BoJ has threatened that the beatings will continue until morale improves.  Japan’s GDP contracted 1.1 percent in December.  In addition, exports, which were supposed to be the great beneficiary of Abenomics, fell 3.2 percent.


3-japan-balance-of-trade@2xJapan’s trade balance has worsened as the yen has weakened – click to enlarge.


Less than Zero

What’s going on?  Wasn’t the purpose of debasing the yen to improve morale?  Wouldn’t the new abundance that should have flowed to Japan provide ample compensation?

Unfortunately it hasn’t worked out that way.  The variables are far too many and far too unpredictable for policy makers to account for. As it turns out, the negative yield on the 10-year government bond was compelled by the negative rate the Bank of Japan is charging for deposits.

For edification, we turn to Paul Vigna at The Wall Street Journal…


“A negative yield on Japan’s 10-year was a fait accompli after the policy moves set in motion by the Bank of Japan.  The buyers of negative-yield bonds, after all, aren’t really average savers – the proverbial Mrs. Watanabe [Japanese housewife] – but rather large institutions, banks mainly, that need a place to park their money.

With the Bank of Japan setting a negative rate for deposits of 0.1 percent, the banks simply moved into the next safe haven – government bonds. It’s not like Japan’s 10-year just went from 5 percent to negative, after all.  Even before the global financial crisis, its yield was under 2 percent.  The policies these banks have imposed, though, designed to spur lending, are instead today spurring more fear.”


nippon_banzai__by_afrosamurai091-d6yzlfuInspiring fear with NIRP

Image credit: afrosamurai091


Who could have seen that one coming? Certainly not the Bank of Japan. The European Central Bank and the Federal Reserve would have had the same oversight.  For there are unintended consequences to every clever new policy imposed.  The ECB and the Bank of Japan are pioneering the way.  Eventually, the Fed may follow their lead.

Regardless, it seems markets have already done so. On Thursday the yield on the 10-year Treasury dipped below 1.6 percent.  Before long, it too might be less than zero. Likewise, we’ll all have to live with the consequences.


4-TNXOn Thursday the yield on the 10-year treasury note briefly dipped below 1.6% and then reversed – click to enlarge.


Charts by: BarCharts, TradingEconomics, StockCharts


Chart and image captions by PT


M N. Gordon is the editor and publisher of the Economic Prism.



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