A previous article discussed the disconnect between soaring markets and troubled economies. Liquidity driven markets only skyrocket so long.
What can’t go on forever, won’t. No one’s sure when. Eventually the music stops. When that happens, watch out. Signals provide clues.
Fed governors hint at slowing QE. Some analysts think by yearend or sooner. Bond prices affect other markets. Spiking Japanese sovereign yields (JGB) suggest trouble.
On May 18, The Japan Times headlined “JGB yield spikes raise alarm bells,” saying:
“Is it a sign of a full-fledged economic recovery or a looming catastrophe in the monetary making?”
On April 5, the benchmark 10-year JGB perhaps bottomed at 0.315%. From there it surged. On May 17, it hit 0.92%. It pulled back. It resumed rising. On May 21, its yield was 0.88%.
At the same time, demand for 40-year debt waned. Yields closed at 1.955%. It’s their highest level in almost a year. Bad auction results suggests hirer levels ahead.
According to Sri-Kumar Global Strategies Inc., Japan’s debt is so large it threatens to undermine its bond market. Doing so has a global effect. More on that below.
Rising levels means higher debt-servicing costs. According to Sumitomo Trust Bank, a 1% interest rate rise increases it by 10 trillion yen by 2020.
On May 14, the Financial Times headlined ” ‘Spiking’ Japanese bond yields recall days of 2003,” saying:
“The 10-year yield has now almost doubled from last month’s low, similar to the initial rise from an almost identical low a decade ago.”
A new Bank of Japan governor then vastly increased bond purchases. Ministers first reacted by a record currency intervention. Public spending replaced it.
“If the parallels continue, bondholders will suffer a lot more pain.” In 2003, rising yields lasted one month. They stayed flat until commodities soared. They did so in 2007.
“The big difference this time is that the yen has collapsed, falling yesterday to its weakest in five years against the dollar, below Y102.”
Domestic bondholders lost only 1% since December. Dollar-based ones are down about 20%. The good news perhaps is defeating deflation. The bad news may undermine doing so.
On May 10, Market Ticker’s Karl Denninger headling “Japan’s Ticking Fiscal Bomb.”
Prime Minister Sinzo Abe and Bank of Japan governor Haruhiko Kuroda may get more than they bargained for.
The yen collapsed against the dollar. It dropped nearly one-third in value. Doing so sent the Nikkei “screaming higher.” Doing so’s not like what it looks.
Currency devaluation to generate inflation has a price. “The ‘bad news’ came in the bond market.” It went limit down on yield.
“Since the government is massively in debt, it will be unable on a cash basis to pay its bills, as they will not be able to roll over the existing debt when it matures and pay the (new) coupon.”
“If (it tries) then (it’s) forced to continue to print even more yen to fund the interest payments, which in turn causes the value of the bonds emitted to go down further – a monetary equivalent of a flat spin – and is unrecoverable.”
Import prices already soared 30%. Japan’s heavily dependent on foreign oil. Many of its other industrial requirements are imported.
In mid-April, former George Soros advisor on Japanese investments, Takeshi Fujimaki, tripled down on warnings.
He believes massive QE won’t stimulate growth. It promises trouble.
“By expanding the monetary base to 270 trillion yen, the BOJ is making a huge bet which I think it will ultimately lose.”
“Kuroda’s QE announcement is declaring double suicide with the government. The BOJ will have to share the country’s fate and default together.”
“The volatility in the JGB market as well as the fact that there is large selling represent fear among investors.”
“They are early signs of a larger selloff and we should continue to monitor the moves in the long-term bonds.”
“Japan’s finance is sinking into the ocean. There’s no escape from a market crash in the future when you have such enormous debt.”
He sold almost all his Japanese equity holdings some time ago.
In early April, Bank of Japan governor Kuroda announced pedal-to-the metal QE. He plans to double Japan’s monetary base. He’ll do so in less than two years.
Any significant rise in JGB yields defeats his strategy. Japan’s government bond market stands at 240% of GDP. It’s the highest debt burden among developed countries.
Debt monetization doesn’t produce growth. Doing what never worked before won’t now. Previous Japanese grand plans failed.
In the late 1980s, BOJ policy escalated asset and property prices. It did so to unprecedented levels. Market crashes, rolling recessions, weak recoveries, malaise, deflation, and dangerous deficits followed.
Japan’s in unchartered waters. Money printing madness fueled the latest rally in global equities.
On May 20, market analyst Graham Summers signaled trouble. Kuroda’s announced $1.2 trillion QE policy hammered the yen. At the same time, it fueled over a 70% Nikkei rally in six months.
“This has been the fundamental driver of this latest risk on rally.” Fed governors suggest reduced QE by yearend or sooner. “So it’s the Bank of Japan who’s in the driver’s seat for asset prices today.”
What’s good for stocks is bad for the yen. “(I)t’s been an absolute disaster for Japanese bonds.” Since announcing new BOJ policy, JGBs “triggered circuit breaks no less than four times due to increased volatility.”
Late last week, they violated their multi-year trend line. They did so briefly. Doing so suggests again. Perhaps they’ll breach it sharply. It matters.
Japan’s bond market is the world’s second largest. If sovereign debt keeps falling, rates rise. Higher levels affect global finance.
Greece impacted it earlier. It’s bond market is miniscule. It’s less than 3% of Japan’s.
For many decades, Japanese bonds were considered “risk free.” Investors bought them at very low yields. Doing so helped Japan’s economically. It grew marginally. Absent foreign investors, it would have fared worse.
If Japanese bonds begin imploding, said Graham, expect trouble. Doing so means:
“The second largest bond market in the world is entering a bear market (along with commensurate liquidations and redemptions by institutional investors around the globe).”
“The second largest economy in the world will collapse (along with the impact on global exports).”
Worse still, global central bank efforts to hold international finance together “will have proven a failure.”
Japan is a major central bank “progressive and accommodating policy” leader. For nearly two decades, BOJ kept interest rates near zero.
It launched nine QE plans. They equaled nearly 25% of Japan’s GDP. Thus far, it’s done so “with minimal consequences.”
Other central banks believed they could replicate BOJ policy. If Japan’s bond market craters, “then it’s Game. Set. Match.”
The greatest monetary experiment ever will have failed. “(W)hat follows will make Lehman look like a joke.”
Global finance is flashing red. It’s sending “major warnings.” No one’s sure what’s coming or when.
Economies are troubled. Monetary stimulus failed. This time won’t be different. All bubbles pop. Harder times loom.
Growth requires job creation. Unemployment’s much too high. Eurozone joblessness hit another record. America’s real rate is 23%.
Dropping money on bank balance sheets doesn’t work. Main Street’s beset with austerity. Dire conditions there matter most.
People can only borrow so much. They can’t spend what they don’t have. Bad policies beget bad results. Economies already are troubled.
They’re heading for potential disaster. It may be worse than expected on arrival. Forewarned is forearmed.
Stephen Lendman lives in Chicago. He can be reached at email@example.com. His new book is titled “Banker Occupation: Waging Financial War on Humanity.” www.claritypress.com/LendmanII.html Visit his blog site at sjlendman.blogspot.com. Listen to cutting-edge discussions with distinguished guests on the Progressive Radio News Hour on the Progressive Radio Network. It airs Fridays at 10AM US Central time and Saturdays and Sundays at noon. All programs are archived for easy listening. www.progressiveradionetwork.com/the-progressive-news-hour