Japanese Bonds Sales Stumble – Is the Public Losing Faith?

Andamento del mercato - 09/03/2016

The emphasis on growth and inflation at all costs has led to some worrisome problems in the Japanese bond market as evidenced by the overnight halt of the 10-year JGB bond which fell by -0.60% following an epic rally earlier in the week.  This is a strong indication that volatility is on the rise in one of the globe’s biggest bond markets after the Bank of Japan cornered the market with its gigantic footprint that has only expanded as time passed.  Although the foray into negative interest rates saw some immediate benefits, namely the weakness in the Japanese Yen, the subsequent losses and interventions by the central bank to devalue the currency underscore a different, starker reality; a loss of faith.  Confidence building measures have in effect done the opposite as the increasingly desperate actions undertaken by the Bank of Japan simply resemble throwing good money after bad.  Fighting a deflationary wave with negative rates creates a complicated set of new risks that makes policymakers look clueless.


Negative rates clash fundamentally with human behavior which for the last several thousand years focused on hoarding and storing wealth.  The idea of stimulating spending by gradually eroding the value of stored assets (cash) runs contrary to nature, creating incentives for misallocation while promoting a short-termist approach to problems.  Instead of focusing on promoting fiscal stimulus and attempting to grow wages at a time when Japanese corporate profitability is at record levels, policymakers have instead opted to go down the rabbit hole of monetary policy, trying untested strategies to inspire and motivate spending at the expense of saving.  While the pursuit of inflation may be Prime Minister Abe's goal, what Japan really requires is a vast structural adjustment that reaches every corner of the economy. More monetary policy measures will result in further bond market halts and greater volatility in other asset classes, specifically the Yen, quickly destroying any remaining confidence in both government, central bank officials and fiat currencies.

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