I now completely understand why interventions or capital repatriation by the GPIF are utterly incapable of stabilising the yen. It makes total sense to me.
Am I missing something here? Net of maturities, the BOJ is currently shrinking both its JGB holdings and its overall balance sheet—and, relative to GDP, the balance sheet is contracting faster than those of either the Fed or the ECB. Gross purchases are not the same thing as net balance-sheet expansion, which seems like a rather awkward omission before concluding that Japan is already in a de facto debt crisis and that 30-year yields would otherwise be in double digits.
Nice read Robin. Isn't a big factor that the BOJ has been purposefully behind the curve with their rate hikes due to scar tissue of decades of no inflation? There is a credible thesis that the BOJ could play catch up and hike more aggressively than the market expects with; inflation persisting, evidence the economy can handle higher rates (albeit slightly higher), and acknowledgement weaker JPY is hurting households. These are just a few factors but thoughts on the potential of a more hawkish BOJ?
However, you've argued that if Japan repatriated its foreign-based financial assets, it wouldn't be facing a debt crisis -- how does this make sense? For example, if Japan had 120% debt-to-GDP with no foreign holdings and then decided to double its debt and invest this newly raised money in foreign assets, why would that make any difference to the financial markets? (Somewhat analogous to slicing a pizza into 8 slices instead of 4 -- still the same pie.)
Robin, you drew a positive relationship between debt to GDP and interest rates. While I agree that the relationship is mildly positive, there are numerous other factors. Euro crisis is a very good example. Ireland, Portugal and Spain all had very low debt to GDP ratio before the Euro Crisis but they experienced a fiscal crisis any way. Japan has 2900 trillion yen household saving that will more than fully finance 1100 Trillion yen JGB. So long as domestic money trust its government bonds, I do not see how a fiscal turmoil would happen in Japan. 30 year yield at 4 percent, with long run inflation expectation less than 2%, is a very decent rate for most pension funds. Also, BoJ is only buying about 14% of the issuance size at 30Y, 40Y sector. So, private sector are absorbing 86 % of the issuance.
The domestic holding structure is what makes the Japan case even stranger than the regression captures. 90% of JGBs held domestically means the BoJ isn't fighting the market the way the ECB was in 2020. It IS the market. The Lagarde natural experiment worked because ECB willingness was genuinely uncertain and the holder base was international enough to sell. Neither condition holds in Japan.
Which means the crisis, if it comes, won't look like a yield spike the BoJ fails to contain. It'll show up in the yen first, as it already is. The shadow yield might well be double digits, but the transmission mechanism runs through the currency, not the bond.
I now completely understand why interventions or capital repatriation by the GPIF are utterly incapable of stabilising the yen. It makes total sense to me.
Thank you very much for precious explanation.
Am I missing something here? Net of maturities, the BOJ is currently shrinking both its JGB holdings and its overall balance sheet—and, relative to GDP, the balance sheet is contracting faster than those of either the Fed or the ECB. Gross purchases are not the same thing as net balance-sheet expansion, which seems like a rather awkward omission before concluding that Japan is already in a de facto debt crisis and that 30-year yields would otherwise be in double digits.
Nice read Robin. Isn't a big factor that the BOJ has been purposefully behind the curve with their rate hikes due to scar tissue of decades of no inflation? There is a credible thesis that the BOJ could play catch up and hike more aggressively than the market expects with; inflation persisting, evidence the economy can handle higher rates (albeit slightly higher), and acknowledgement weaker JPY is hurting households. These are just a few factors but thoughts on the potential of a more hawkish BOJ?
Robin, isn't *net* debt the most appropriate metric? Implying a more manageable, albeit far from trivial, ~100bp adjustment?
However, you've argued that if Japan repatriated its foreign-based financial assets, it wouldn't be facing a debt crisis -- how does this make sense? For example, if Japan had 120% debt-to-GDP with no foreign holdings and then decided to double its debt and invest this newly raised money in foreign assets, why would that make any difference to the financial markets? (Somewhat analogous to slicing a pizza into 8 slices instead of 4 -- still the same pie.)
So is this a case of Mr Macawber - hoping against hope that 'something will turn up"?
None of this is an.snalytic narrative
Its pantomime ambiguity
Without a limitlessly self funding
Central bank for central banks
The system is about chronic tilts
And occasional shocks
Shocks that don't get easily digested
At ground level
Robin, you drew a positive relationship between debt to GDP and interest rates. While I agree that the relationship is mildly positive, there are numerous other factors. Euro crisis is a very good example. Ireland, Portugal and Spain all had very low debt to GDP ratio before the Euro Crisis but they experienced a fiscal crisis any way. Japan has 2900 trillion yen household saving that will more than fully finance 1100 Trillion yen JGB. So long as domestic money trust its government bonds, I do not see how a fiscal turmoil would happen in Japan. 30 year yield at 4 percent, with long run inflation expectation less than 2%, is a very decent rate for most pension funds. Also, BoJ is only buying about 14% of the issuance size at 30Y, 40Y sector. So, private sector are absorbing 86 % of the issuance.
The domestic holding structure is what makes the Japan case even stranger than the regression captures. 90% of JGBs held domestically means the BoJ isn't fighting the market the way the ECB was in 2020. It IS the market. The Lagarde natural experiment worked because ECB willingness was genuinely uncertain and the holder base was international enough to sell. Neither condition holds in Japan.
Which means the crisis, if it comes, won't look like a yield spike the BoJ fails to contain. It'll show up in the yen first, as it already is. The shadow yield might well be double digits, but the transmission mechanism runs through the currency, not the bond.