Japan is seeing a violent bond sell-off - Rabobank

Michael Every, Head of Financial Markets Research at Rabobank, notes that the Japan is seeing a violent bond sell-off similar to that which Germany experienced briefly last year.

Key Quotes

“Although the Japanese government unveiled USD45bn of fresh fiscal stimulus Tuesday the market already knows that is too little to revive the ailing economy. Moreover, it is starting to question the BoJ’s stance ahead. Governor Kuroda has pledged to reassess the success (or rather lack of) his extraordinary monetary policy at the early September meeting: concerns are building that rather than go the route of ‘helicopter money’, i.e., backing sustained fiscal stimulus with more monetary stimulus, the BoJ may throw in the towel and stress that it is structural factors that are holding back the economy. For example, it may concur what I have long argued on Japan: that raising CPI to 2% y-o-y without raising wages first, harms rather than helps consumers and the economy.

While such BoJ thoughts last we may see JGB bond yields rise further, especially given the debt picture is not sustainable without Kuroda’s largesse. Yet that capital outflow may still mean an inflow elsewhere, potentially pulling other bond yields lower again - after all, a flailing Japan is a negative, not a positive for global growth prospects, and lower oil means deflation not inflation. Meanwhile JPY will continue to appreciate; with a test of 100 looking likely near-term, that ‘risk-off’ trade will keep hitting equity markets.”