Japan, the country’s luck is over!

The Bank of Japan has struck anyway.

At noon on December 20, 2022, the Bank of Japan released a policy statement that raised the target ceiling for the 10-year Japanese government bond yield from 0.25% to about 0.5%. At the same time, the BOJ announced a new YCC range of between plus and minus 0.5%.

This widening of the yield curve control band can be roughly interpreted as a boost to Japan’s medium- and long-term interest rates.

Japanese government bond futures fell on the news, bond yields shot straight up to a 7-year high, and the stock market fell sharply as well.

First, let’s explain YCC (Yield Curve Control).

Usually, short-term bonds have lower yields and long-term bonds have higher yields (just like short-term deposits have lower interest rates than long-term deposits). The yield curve is a line drawn on the horizontal axis of the bond’s maturity (from 3 months, 6 months to 20 or 30 years) and the vertical axis of the bond’s yield.

The so-called yield curve control is when the central bank makes the Treasury yield curve satisfy certain conditions by buying and selling bonds of different maturities in the market. In the case of Japan specifically, in 2016 the BOJ announced the implementation of YCC, which maintains the yield on short-term government bonds at -0.1%; it maintains the yield on 10-year government bonds at 0% and places a limit on the daily floating ceiling, initially at ±0.1%, later adjusted to ±0.25%, and now this time, adjusting it to ±0.5%.

Further, after the BOJ announced the adjustment to the YCC range, all benchmark yields on the JGB yield curve, except for short-term notes of one year and below, are now in positive territory for all JGBs from the 2-year upwards.

The near-zero size of Japan’s negative-yielding government bonds is also symbolically important in the world.

Because of the violation of the natural laws of wealth and money, nominal 0 or negative interest rates, in theory, should not exist, but since 2014, absurdly negative interest rate bonds have emerged in Europe and Japan under extreme manipulation of bond markets by governments and central banks.

By the end of 2020, the total size of negative yield bonds worldwide reached a staggering $18 trillion, accounting for almost a quarter of the total size of bonds in the global market, a size that even exceeds the size of China’s GDP.

These negative-yield bonds are basically government bonds of Japan, the Eurozone or the Nordic countries, as well as some bonds issued by European and Japanese companies with particularly good credit.

Over the past few years, I have written a number of articles lambasting these absurd negative yield bonds, arguing that both the people who made them and the people who bought them deserve the wrath of God.

“Divine retribution,” finally, comes in 2022.

As the Federal Reserve raised interest rates, Treasury yields in all major Western countries except Japan have risen rapidly (see chart below), while the prices of negative yield bonds have plummeted and the size of negative yield bonds worldwide has shrunk rapidly.

By early February 2022, the total size of global negative yield bonds had shrunk to $4.9 trillion, while the size of negative yield bonds in Europe, the birthplace of negative yield bonds, had contracted sharply to $1.9 trillion, leaving $3 trillion in negative yield bonds, mainly Japanese government bonds.

By April 2022, all negative-yielding corporate bonds, in the market, disappear.

By August 2022, German 3-month Treasury yields turn positive and negative-yielding Treasuries in Europe largely disappear.

After Japan adjusted its YCC policy, the total size of negative yield bonds worldwide, today, has dropped to less than $700 billion (see chart below), which is a world away when you consider the $11 trillion size a year ago – and all those people and institutions that bought negative yield bonds, suffered their fair share of “punishment”.

Before 2022, there were still many central banks around the world upholding negative interest rate policies – such as the European Central Bank, the Swiss Central Bank, the Riksbank, the Bank of Denmark, the Bank of Japan, etc. With a full year of global interest rate hikes, now the only central bank still pursuing negative interest rate policies around the world is the Bank of Japan. A “sole”

Investment bank Goldman Sachs expects that the Bank of Japan’s next move, after unexpectedly expanding the range of fluctuations in benchmark government bond yields, is likely to be the complete elimination of negative interest rates.

According to the World Bank, Japan’s government debt reached a staggering ¥1,251.4 trillion as of the third quarter of 2022, while its total GDP for the past four consecutive quarters was only ¥544.9 trillion, which means that Japan’s government debt/GDP, at a staggering 230%, ranks first among all economies in the world and far outstrips other economies — in fact, the other major global economies with the heaviest government debt burdens are not even half of Japan’s.

Considering Japan’s government debt as a whole, assuming that its debt as a whole needs to be replaced in 8 years, a less rigorous calculation shows that every 0.1% increase in interest rates by the Bank of Japan means that the Japanese government needs to spend an additional 156.4 billion yen in interest, which will immediately be converted into additional government debt in Japan again.

Before 1990, the government debt was not a big problem because of the rapid economic development and the simultaneous growth of government revenue and expenditure. However, after the burst of the bubble economy, Japanese government expenditure continued to grow while tax revenue was stagnant, so the government had to rely on the issuance of government bonds to raise funds, which led to the increase in the size of Japan’s national debt.

From the expenditure side, after 1990, Japan’s social security spending increased dramatically because of the aging population, which made the Japanese government spend more than 400 trillion yen extra, while the transfer payments to local governments made the Japanese government spend nearly 100 trillion yen extra.

From the revenue side, the economic downturn and the decline in tax revenue from the Japanese central government due to tax cuts amounted to nearly 200 trillion yen.

Spending – revenue summed up, it gives the Japanese government an additional 700 trillion yen of debt, which is the source of the Japanese government’s ultra-high government debt burden.

Japan’s social security, has long been unable to make ends meet, all rely on the government to issue debt, the following chart, it shows that Japan’s social security welfare spending after the 1990s rose sharply, and spending, the proportion of public spending by the central government is increasingly high, and now has reached nearly 40%, each fiscal year spending more than 50 trillion yen, compared to the Japanese government’s tax revenue in recent years is also in 50 trillion yen a year or so.

Analyzing Japan’s population age data in detail, we will find that the total number of Japanese seniors who have reached or exceeded the age of 75 has surpassed those aged 65-74 since 2016 – and it is well known that those aged 75 and older spend even more on medical expenses and long-term care than those aged 65- 74 year olds in the age group……

If Japan so far in 2016 is bad enough when it comes to government debt

Then Japan after 2025 will only be worse on government debt.

Then, Japan after 2040 will be a world-class catastrophe in terms of government debt!

In this round of Fed rate hikes in 2022, the continued depreciation of the yen is certainly caused by the difference in Treasury yields on the one hand, but on the other hand, there is no shortage of bearish Japanese national fortunes because of the aging of the Japanese population.

Because, whether it is the age structure of the population or the government debt –

Japan in every year since 2016, and every year after that, has been the best Japan for decades after that again.


Leave a Reply

Your email address will not be published. Required fields are marked *