Surprising Reasons Why Japan’s Economy Might Win Big as U.S. Suffers Huge Blowback

Surprising Reasons Why Japan’s Economy Might Win Big as U.S. Suffers Huge Blowback

Good morning. This is Paul and Ken of the Sirius Report. Well, Paul, there’s a surprising reason why Japan’s economy might actually win big as the US suffers huge blowback. Yeah. And absolutely. And we This will contradict what a lot of people’s perspectives are. And of course, all people will also say that what we’re proposing can’t happen. Well, in this day and age, don’t assume anything. and don’t make assumptions that things can happen, will happen, or won’t happen. So, we’re going to address the reasons why what we’re currently seeing with Japan’s bond markets actually could have a very different outcome than what conventional wisdom suggests. and we’ll assess why and ultimately why Japan can be a major beneficiary from this as opposed to the United States who principally will suffer more than any nation and hence why there’ll be this huge blowback on them as a result of what we’re currently seeing. And that’s why we want to discuss this today because I think there is a big story that needs to be uh understood because let’s start with the fact that there’s been a lot of coverage about Japanese bond markets and the yields rising rather sharply which is true. I mean if you look the fact on the 30-year bond it rose as high as 3.14%. On the 40-year, it reached an all-time high of 3.6%. And the 20-year bond yield jumped by about uh to as high as nearly 2.6%. And that followed an auction in which obviously the tail, which is the gap between the average and lowest prices, was the biggest since the late 1980s. Of course, that sends shock waves through the financial system. analysts and people who think Japan’s falling apart. It’s game over for Japan because Japan’s had these ultra low interest rates obviously for a considerable period of time and the Bank of Japan basically owns about half of all the JGBs. But this is an opportunity where Japan can and as a small window if it makes the right moves make some major changes that will benefit its economy and its financial position. Now, of course, what’s interesting as a backdrop to this with these interest rates is there are all these concerns, sorry, the yields on the bonds is about the Bank of Japan is tapering of its bond purchases. There also concerns about the economic risks because Japan hasn’t agreed anything in terms of trade tariffs with the United States. and of course Japan’s gross national debt which is more than 200% of annual GDP. So when you factor in those kind of uh figures, people immediately jump to conclusions. But let’s assess what this means in reality for for Japan. Because if they actually allow their bond markets to function normally and therefore they’re going to encourage Japanese investment. So Japan would then repatriate capital uh to obviously or Japanese investors to Japan. Most of the Japanese debt is in yen. And if you have much higher yields, it’s likely to also hugely increase the repatriation of the capital. That’s positive for the yen. I mean, and if you look at the long end of the yield curve, that’s less of a funding issue than the short term up to say 10 years. And they’ve been pretty okay anyway. So if you’re looking for capital, which Japan needs, then they’re going to have to price their debt in a way that’s actually consumate to what reality or the economic financial reality is. Otherwise, nobody’s ever going to buy their debt, not even allies, etc. And that’s hence what’s happened for a very long time. and why the BOJ buys up most of the debt or significant proportion of the debt and therefore that alone could help stimulate true proper functioning bond market and it might not just uh attract Japanese investors pulling the money out and we’ll explain where that’s coming from surely but also encourage other countries to buy Japanese debt for example maybe the Chinese will buy Japanese debt. Maybe the the Gulf uh region will buy Japanese debt. This could help actually have normalize their bond markets, which is an important component of stabilizing their financial system. Now, we’re not saying definitively this is going to happen, but it is it is something that could happen. And if they’re very clever in how they manage this process, then it might also help the Bank of Japan unwind their enormous uh JGB balance sheet holdings. Okay, it’s a long process, but they they if they intelligently do this, then they can handle uh what the the fallout’s going to be if they don’t handle this well. uh but I yes can see inherent problems in the Japanese economy financial system with spiking yields but in Japan’s case there might be this opportunity when we just highlighted one example why that might be beneficial to them you know one of the more interesting things I’ve seen recently about Japan is they you know obviously you mentioned they they’re at a crossroads um you would never in the past have seen Japan stand up to or be in opposition to things that come from the United States. You know, for the longest time that Japan has been for all intents purposes a vassel uh of the US and sort of a I I want to call it a whipping boy. the use of their currency, the use of their uh the bond markets for Wall Street to do its its shenanigans. But with that being said, there was the inference that from a a finance minister that because of the tariff uh conflict that’s going on coming from the Trump administration that potentially Japan could use its treasury holdings as a means to uh stand up to the US. But that’s not just the the entire thing. Japan is also a part of many of the different uh Southeast Asian uh organizations that are ste uh cropping up that are outside of the dollar hegemonic system and I see it as uh the potential for Japan to finally stand on its own because if you think about it they still are a producer nation they’re a for relative a debtor nation so they have capital it’s locked up in many cases in investments in the US. Uh, a lot of it is tied into their own system, the bonds and the and the stock market, but they do have capital if they need to go ahead and move forward. Of course, their biggest uh necessities are energy, which I think you’re going to get into what they might be doing with uh the Gulf region, and then of course the potential to pivot towards China, which they are have been slowly doing over the past few years, and that could make the Southeast Asia a much more powerful entity to stand up against the old US European and uh hedgeimonyy. Yeah, there’s a number of points there. First off, obviously Japan’s uh China’s Japan’s largest trading partners. Not often understood about that. And the other point with regards to raising all this finance in a properly functioning bond market is if they’re intelligent and use that finance to grow the economy, not to, you know, to to prop up failing banks or whatever else they think they need to do to and basically just gets chewed up in financialization nonsense. Then what they can do is use that to grow their economy to get investment from the Chinese, from the Gulf region, anywhere else in the world and actually grow their economy and also form strong relations with with tech companies and with the Chinese for example or anyone else for that matter and actually try to really grow their economy as they very successfully did in like the 80s for example. But the thing and this is where the blowback is for the United States and this is not well understood because Japanese interest rates have been so low for so long. This can lead and people have talked about the unwinding of the yen carry trade. Now for anyone who doesn’t know what that means that’s when investors borrow in the yen a very low cost. Well, that’s going to no longer be the case as things stand. And then they buy assets with obviously higher yields abroad. And this is typically what has happened with the United States. Now, if they have a fully functioning bond market, investors will then pull their money from those assets and they have enormous amounts of money tied up in the United States and US dollar denominated assets. They’re then going to bring that capital back to Japan, invest it in Japan, and it’s going to cause major problems on that basis if that happens for the United States. So what you then realize is both the US Treasury because you made the point K they can dump enormous amounts of treasuries in the process and US equity markets are going to be very very vulnerable because they have been inflated by all this Japanese inflow into treasuries into equity markets that has also inflated the dollar and if obviously much higher yields transpire uh particularly at the long end of the yield curve then Japanese investors are going to pile home the carry trade will completely unwind and that’s going to cause huge problems for US financial assets so therefore the long end of the JGB yield curve really is something people should pay a huge amount of attention to for the very reasons I’ve just suggested Now, you know, another thing that could cause is or sorry, one big reason why we’re seeing this huge rise in Japanese yields because the Bank of Japan’s kind of saying, you know, we’re not going to be supporting the bond market the way they are, they’re going to let its holdings basically roll off, not roll over. And if the Bank of Japan’s no longer in the market and the vast majority of Japanese bomb buyers uh are all could therefore be domestic buyers, that’s all going to have huge problems for US stocks. If you recall back in the summer of last year when there was the the remember the rate hike from the Bank of Japan, the S&P for example fell about 6%. Now, if this starts to become a something that’s sustained and huge amounts of Japanese capital leaves the US, then the blowback on the United States is going to be enormous because there’s no doubt about it. Bank of Japan endless QE has been absolutely one of the main reasons why we have all these equity bubbles in the United States. So if the reverse happens, you’re that’s going to cause a route in the US and people will go that’s well how how exactly is that going to work? Well, we’ve and therefore what you’re saying how is that possible? You’ve just explained very clearly and succinctly exactly what the outcome could be. I mean, and you know, the idea that that Japan could actually cause a major financial crisis in the west should never be underestimated. I mean, and if you look, where did the tech bubble start bursting first? It was actually in Japan in the late ‘9s. So there is a precedent that Japan can make decisions that can hugely be beneficial for the bond market for internal investment. It’s good for the yen and it could be massively detrimental as I said for US equities and the US bond market and in general whatever else uh Japanese investors are invested in, they pulled their investments out. that’s going to have a knock- on effect. So, I think that’s sort of for me explains very succinctly the issues to do with Japan pulling money out of the the United States in huge sums. We’re talking hundreds of billions. I mean, if you add in US treasuries, we’re talking tr I don’t know, trillions. So, that is nothing to be sniffed at. You can’t just dismiss it and say, “Well, Japan’s not going to do this.” Well, Japanese investors will. And because if they think I can park my money at home and I’ve got a better return and I’m starting to have a proper functioning bond market, then you know maybe yields will rise higher and eventually they’ll find a proper equilibrium as bond market should be and not all this yield curve suppression. And suddenly if you have a functioning bond market the world’s going to go well I’m having a I’m having some JGBs and suddenly Japan is able to then and if it does things sensibly as I said and it invests in the right areas of its sector sectors the tax sector for example then it might be able to have a actual reason to believe that it can have economic real economic growth in the future. And this comes also back to the fact that everyone at some point is going to have to start walking away from financialization and have a real economy with real markets and real bond markets is one of those. Now we’re not saying this is a path of no least resistance. There’s no problems in this. Of course there is. But this is perfectly feasible. what was what I’ve just said now that that could happen and therefore that’s positive for Japan and extremely and extremely is not an exaggeration a negative for the US and then we’ll come on to energy and broader investment shortly. Yeah, it’s kind of fascinating, you know, in the p past 20 25 years when Japan has had issu issues and have been in the news regarding uh their bond bond yields. Um they’ve relatively been on an island. It’s just been them and then of course the uh Bank of Japan comes in, they monetize and and they do the whole thing. But now it’s starting to occur at the exact same time that the US bond market is starting to implode where yields are really starting to spike. So there is the potential question that is is Japan just feeling some of the effects the old when the US uh catches a cold or coughs or sneezes the rest of the world catches a cold. is the bond market because of its uh uh ties to the carry trade is a starting feel of the effects of the United States versus some internal intrinsic problem with that being said of course if that’s what you know many ways what’s going on you made the point an important point that many investors around the world both in the US in Europe and especially in uh Asia they are pulling investments out of the US whether it’s because of fear of the tariff thing or uh distrust of the dollar distrust of treasuries you know the any myriad of of reasons but go back to 2009 2010 2011 when the great recession hit and trust in the dollar shot that uh shot that currency the world reserve currency down to 72 on the DXY the money that was being invested was not being invested in the United States or it wasn’t being invested in Europe. That was the era of emerging markets. 14 to 16 trillion dollars was being put by investors into China, Japan, Vietnam, Southeast Asia, etc. India. So we have a precedent within the last 15 years of massive amounts of capital fleeing the United States and going into uh the emerging markets. So when we talk about the potential that Japan can can succeed and profit from and and get stronger by what’s taking place, there’s already a precedent where they did get this and are they going to make the right choices? because yesterday there was a uh meeting of uh the G7 and of course you know their typical thing giving lip service to oh we have to be strong and and uh consolidate against uh China’s trade practices. Meanwhile, Japan has already you know as you mentioned ch China is their biggest trade partner and they’re looking to increase and uh go even further in this. So the power of the western financial institutions like the G7 are in are waning very fast while behind the scenes the nation many nations within that group are doing their own thing and I really think uh Japan wants to get out of the malaise that they’ve been stuck in for the last 40 years with their stagflation and find a way to move ahead because they do see uh the multipolar world as being the future rather than just simply being tied to the dollar and the dollar system. Yeah, absolutely. I mean look, politically there is huge hurdles to be overcome here. We know this. I mean there are still long-standing issues with China, the South China Sea, a lot of this is fueled by their due deference that is Japan to the United States. But China can be a major trading partner as can the Asian countries and Japan has that relationship with them. One of the biggest Achilles heels though for Japan is energy because they’re totally energy dependent. So they need to to get on board with OPEC plus. This means the Saudis and the Russians get cheap oil, cheap LNG. It’ll have to be obviously. And because that can be the lifeblood of a of a resurgence of Japan as a nation, the repatriation of Japanese capital will be a critical part of this uh without any shadow of a doubt and as we’ve highlighted that’s perfectly feasible for that to happen. So they’re the sort of principle things Japan needs to do and then to attract with the inward investment they can then get away from financialization from basically the malaise they’ve had since the plaza records which was specifically put in place by the Americans to crush Japan’s economic capabilities and to put them in the doldrums for decades. They need to walk away from that and start to realize that Asia is going to be a massive pole in a multi-olar world. They need to be on the right side of of history and make sure that they actually can benefit from this and realize that China isn’t an enemy and that in fact the United States has absolutely done them no favors for for decades and beyond. But I think you know part of Japan’s problem is is still arises and I’m not saying this the United States is going to repeat this but what happened at the end of World War II uh obviously the two nuclear bombs being dropped has had a massive negative impact on Japan and rightly so given the severity of what’s happened. They need to realize that they should be the drivers of their own future, their own destiny, and then they can grab their chance of victory from the jaws of certain defeat. There’s still no guarantee they could carry on and completely implode. But this is an opportunity to actually grab the multipolar world with both hands and to be in a position where there’s an upcoming meeting that’s supposed to happen at some point between uh Basso and the finance minister Kato and there’s been certain inclinations that have been kind of denied that we’re not going to talk about the currency and we We’re there to talk about negotiating trade deals, but there is speculation that there over the possibility of US pressure for a weaker dollar. I mean, again, they need to just stand up and go, “No, I’m sorry. We’re we’re not doing this anymore.” But we know Japan’s recently notified the WTO over potentially implementing retaliatory measures in response to US tariffs on steel and aluminium. So there is a bit of bite in Japan. I’m not saying it’s um going to to lead them out of the doldrums and into a positive bright future. But these are decisions that countries like Japan in May of 2025, they need to realize this this they’re drinking at the proverbial last chance saloon. This is an opportunity for them to make all the decisions that can massively transform not overnight their economy, their financial system. They might be able to unravel a huge amount of mess they’ve created and it’s largely self-inflicted because of their vessel status with regards to the US. And I think we’ve highlighted from my perspective the main reasons why they can be enormous beneficiaries but also the United States in the process is going to suffer huge blowback. And this as much as anything does relate to tariff policies, not entirely, but also because Japan I think is finally or elements certainly the BOJ is beginning to realize there is an opportunity here and this can have all these potential beneficial effects and it’s very very possible. In fact, it’s totally achievable. The only thing that will stop this happening is either internal politics or the fear of upsetting the United States. But there’s going to come a point, as is always happens, where the United States is going to have to be far more worried about what’s going on domestically. But from Japan’s perspective, this is an opportunity they’ve not had in decades, and they need to grab it with both hands. And if they do and they make some really tough decisions, then Japan could be the turnaround story of of arguably the last 50 years or maybe even longer. That’s potentially how big this could be. So the ball’s in their court and we wait to see what they do. Absolutely. And you know in many ways uh the way Iran the way Russia the way China have been able to stand up uh to the United States and all the pressure that’s been put on them uh Japan could you know come to that realization that now is the time that we can do the same and we don’t have to fall under this under the opaces of uh the U you know Washington just coming in and beating them down into submission but instead having to treat them as an equal the same way that the multip polar world is wanting to treat everyone as uh unequal amongst equals. Uh anyway, Paul, was there any other thoughts you wanted to uh give regarding this? No, I think that’s a good point to stop. Absolutely. And uh to everybody here at the service report community, thank you as always for your support. Don’t forget to like, share, subscribe, comment, send this out to anybody you think it might be important to. And until the next time we get together, have a great day.

Paul and Ken assess why recent developments in Japanese bond markets could signal an unexpected economic revival, whilst the US suffers huge economic and financial blowback.

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