The weakening of the Japanese yen might continue according to the tweet below
The US-Japan 10-year yield spread has narrowed to 2.09 percentage points (the lowest since March 2022), as US rates have fallen and Japanese rates have risen to 1997 peak levels. Nevertheless, the dollar strengthened, which points to concerns regarding debt and interest costs related to Japan.
https://x.com/KobeissiLetter/status/2007187390457360529
The article below states that the world is in turmoil as competition between the US and China erodes free trade. Keynes is mentioned because he predicted a massive rise in living standards a hundred years ago, but the present is overshadowed by the selfishness and internal problems of the great powers.
In this situation, Japan reportedly needs to leverage its strengths, such as its technological expertise and security capabilities. The country must be an indispensable partner to the US, while simultaneously strengthening cooperation with other democracies and creating its own independent survival strategy for the future.
According to IMF forecasts, Japan is set to drop from its position as the world’s fifth-largest economy this year as India overtakes it.
According to the article, this development is explained by the weak yen and sluggish growth. The government is seeking growth through investments, but on the other hand, an aging population and weak productivity are weighing it down, as has also been mentioned in this thread.
Inflation is being fueled by more expensive “imports” and, of course, trade disputes; furthermore, current relations with China could weaken exports as well as tourism.
Bank of Japan Governor Kazuo Ueda said that the policy rate will be raised further if wages, growth, and inflation progress in line with forecasts. According to the Governor, the economy is resilient and wages and prices are rising moderately.
The BOJ meets on January 22–23 and will update its forecasts then, which will likely influence the decisions being made. Well, the weakening of the yen continues and adds at least to inflationary pressures.
China has banned the export of dual-use products to Japan, a move Japan considers completely unacceptable. The dispute escalated following Prime Minister Sanae Takaichi’s comments regarding Taiwan, which China is naturally demanding be retracted. The restrictions could expand to include critical rare earth metals, threatening Japan’s automotive and technology industries in particular.
A potential export ban could cost the Japanese economy billions of euros. However, the markets have reacted only cautiously negatively to the news—so far.
Japan’s service sector grew in December, but at a slower pace than before; Services PMI fell to 51.6 (Nov 53.2)
New orders and demand strengthened modestly, and foreign demand turned to a slight increase. Employment grew rapidly, cost pressures accelerated, and companies raised prices.
The broader S&P Global Japan Composite PMI Output Index, which includes both manufacturing and services, fell to 51.1 in December from 52.0 in November, indicating the slowest growth in seven months. Manufacturing production stabilized after a five-month period of decline.
Below is a link to a news article detailing how Japan is intensifying its cooperation with G7 countries and South Korea to counter China’s tightening export restrictions.
China has restricted the supply of critical rare earth metals, which naturally delays industrial production. Japan is seeking to strengthen its economic security and alliances in a context of growing tensions between Asian superpowers, particularly concerning Taiwan and trade policy.
The impact of China’s latest move is still unclear, but existing export controls have already lengthened the time required to procure rare-earth magnets, said Hiroshi Yamada, president of Tokyo-based Sanshin Kinzoku Kogyo, which manufactures and sells magnetic equipment. Neodymium magnets in particular have been affected, with procurement lead times growing to three to four months, instead of the usual one to two, he said.
Japan’s two-year government bond yields have risen to their highest level since the 2008 financial crisis.
This likely reflects investor expectations and the breaking of the country’s long-standing zero-interest-rate policy in this global economic environment.
https://x.com/KoyfinCharts/status/2010042473205379520
The Japanese yen has weakened drastically because the country’s interest rates are low and it is heavily indebted.
For this reason, the price of gold in yen has surged to record highs, multiplying in just a few years. Consequently, gold is now seen as a safe haven as the yen continues to lose value against the rest of the world.
Japanese government bond yields have risen to record highs.
Markets fear that Prime Minister Takaichi’s stimulative economic policies will further increase the country’s massive debt burden. This forces the central bank into a difficult choice between defending the currency and controlling interest rates, which, according to the tweet, then destabilizes the economy.
Japanese government bond yields are surging across the curve, with the 5-year yield jumping to 1.62%, the highest since its debut in 2000.
The article linked below reports that the yen is approaching its 2024 lows because markets are demanding a higher “premium” for investors due to Japan’s increasing debt risks.
The central bank’s artificially low interest rates are constantly weakening the currency, but on the other hand, raising them threatens to trigger a severe financial crisis because of the country’s massive debt burden. Instead of traditional and ineffective currency interventions, the article suggests that Japan should sell assets to reduce its debt. This measure would reportedly ease the continuous pressure on the yen and allow for a necessary adjustment of interest rates.
Japan’s net debt stands at 130 percent of GDP versus gross debt around 240 percent. Much of this is illiquid and can’t be sold at short notice. But even a gesture in this direction will make a big difference for the Yen. This is the way forward for Japan. Not official FX intervention, which will be just as ineffective as in the past.
The article below goes into a bit more detail, but I’ll highlight what I think are the most essential points. The Bank of Japan’s upcoming meeting has kept markets on edge, even though it is generally believed that the policy rate is expected to remain unchanged.
However, last month’s rate hike to the highest level in 30 years has not stopped the yen from weakening, and investors are looking for signs regarding the timing of the next hike. Inflation has stayed above the target for several years now, which in itself adds pressure to tighten monetary policy.
A weak yen could further accelerate price increases. Additionally, the article points out how the situation is complicated by the Prime Minister’s potential snap election, which naturally hinders and slows down progress as well as predictability.
The yield on Japan’s 40-year government bond has risen to four percent as investors sell off their bonds.
The article states that market volatility is driven by Prime Minister Takaichi’s announcement to dissolve parliament and hold snap elections as early as next month.
Markets fear that the tax cuts and stimulus measures planned by the government will further weaken the country’s public finances, which could impact risk premiums.
Key Points
- Japan’s 40-year government bond yields notched a record high on Tuesday.
- The moves came a day after Prime Minister Sanae Takaichi announced a snap election on Feb. 8.
- Analysts see a return of the “Takaichi trade,” not a systemic crisis.
Japanese government bond yields have risen sharply, particularly the 40-year bond which has surpassed 4 percent.
Oxford Economics believes the rise was too rapid, so yields may stabilize at least temporarily in the early part of the year. On the other hand, they still expect yields to rise again later, as Japan’s economic policy remains somewhat unclear and the central bank (BOJ) is reacting slowly.
Foreign investors have been selling bonds aggressively, while Japanese investors are shunning them due to high volatility.
The latest leg higher in yields has been driven in large part by overseas bears. The surge “appears to have been primarily triggered by foreign investors actively adding short positions,” Oxford Economics said after Prime Minister Sanae Takaichi called snap elections and vowed to suspend the 8% consumption tax on food for two years. This pledge is “likely to undermine Japan’s already fragile fiscal position and inflation expectations," the strategists warned, leading markets to “overprice” the odds of a comprehensive victory for her ruling LDP.
The Bank of Japan kept the policy rate at 0.75% as expected, although one board member would have raised it by 0.25 percentage points.
The BOJ nonetheless raised its growth and inflation forecasts in hopes of fiscal stimulus. In the markets, focus is turning to Ueda’s policy lines; for example, a rate hike is still seen as likely, but there is no clarity on its timing. The yen weakened slightly.
But questions over how Takaichi will fund her fiscal plans, especially in an economy already burdened by government debt, sparked a deep sell-off in Japanese bond markets through January.
This notion also weighed on the yen, with the Japanese currency weakening slightly after the BOJ decision.
Henri Huovinen has written about Japan and, among other things, its interest rates & debts.
The policy rate was raised in December to its current level, which is the highest in thirty years. The Bank of Japan has raised the policy rate four times in the current cycle – the first of which was in March 2024.
The central bank’s first interest rate meeting of the year was held in a challenging bond market environment – the yield level of Japanese government bonds has risen significantly recently.
In this situation, the market was relieved that BOJ central bankers continued a cautious line in tightening monetary policy and maintained a positive outlook on the economy.
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