Il caos obbligazionario giapponese: il fattore scatenante della prossima corsa al rialzo delle cr…

Il caos obbligazionario giapponese: il fattore scatenante della prossima corsa al rialzo delle cr…

last year a surprise rate hike from the Bank 
of Japan nuked financial markets the world over and sent Bitcoin plunging 30% but if you thought 
that was bad Japan’s monetary wos might be about to spill over again for an act two that could 
be much worse so stay tuned to find out why the market for Japanese government bonds could 
end up being the global fiat ponzies canary in the coal mine my name is Nick and you’re watching 
the coin bureau when the Bank of Japan raised its policy rate from 0.1% to 0.25% 25% last summer 
it triggered a chain reaction that vaporized trillions of dollars from global markets in the 
central banking equivalent of a Thanos finger snap this fractional increase in interest rates sent 
Japan’s major stock indices plunging 12% in the so-called black Monday that also saw gold Bitcoin 
and US tech stocks falling off a cliff i am of course talking about the global liquidation event 
caused by the unwinding of the yen carry trade on the 5th of August 2024 now if you’re not familiar 
the yen carry trade involves borrowing yen at Japan’s historically negligible interest rates 
and plowing that money into higher yielding assets globally now for context the BOJ’s policy rate 
was minus0.1% until March 2024 and ranged from 0% to 0.1% thereafter the huge difference or delta 
between these near zero rates and interest rates in the rest of the world has been the source of an 
extraordinary arbitrage opportunity for investors so extraordinary in fact that the yen carry 
trade is not so much a trading strategy as a global liquidity phenomenon its sheer scale is a 
matter of debate a Deutsche Bank once floated a $20 trillion figure while data from the Bank 
for International Settlements tallied Japanese bank’s foreign lending at at least $1 trillion by 
March 2024 japan itself holds a $3.4 4 trillion net international investment position making 
it the world’s largest creditor whichever way you slice it this phenomenon means that Japanese 
monetary policy is a very big deal for the rest of the world they say that when America sneezes the 
world catches a cold but the events of last summer suggest that so much as a hiccup out of Japan 
is enough to give the rest of the world a heart attack and that’s what we saw last year when BOJ 
Governor Kuzo UEA announced the rate hike to 0.25% and made some unexpectedly hawkish commentary 
about further rises in hindsight it’s remarkable that market participants were so unprepared for 
this because there were signs everywhere the weeks leading up to the BOJ’s meeting saw a 38-year low 
for the yen against the dollar tightening labor market data accelerating core inflation and even 
political pressure for a hike yet a Reuters poll of Japanese economists just before the BOJ meeting 
showed that 3/4 of them didn’t think it would happen and so it was that the market was caught 
with their pants down the yen rallied Japanese stocks crashed and the contagion spread globally 
as a liquidation cascade on August 5th forced traders to sell whatever they could to repay their 
yen loans the market crash was swift and brutal with short-term futures positions which were the 
primary casualties mostly wiped out by August 6th however despite the liquidation flush the delta 
that fuels the carry trade did not go anywhere the Bank of Japan was quick to nurse the markets 
with talk about not raising rates further amid instability but the core issues remained now 
all of this was quite a shock to the markets but it was fundamentally a reaction to a 
change in policy expectations or really a misreading of the monetary tea leaves by market 
participants and Japanese economists apparently surface again possibly preparing to liquidate 
us all over again with a new macro shock and if that happens it won’t be as transient as the one 
that happened last year and that’s because this time we hearing grumblings of a more systemic 
problem coming from the market for Japanese government bonds or JGBs recently the market for 
JGBs and particularly super long JGBs those with maturities of 20 30 or even 40 years have been 
showing serious signs of stress yields on these bonds have been going through the roof recently 
with the 30-year JGB yields hitting record highs and the 20-year yield reaching its highest level 
since 2000 and this means that the market is demanding higher compensation for lending money to 
the Japanese government especially over the longer term government bonds are supposed to be some 
of the safest assets around the world though so uh what’s the story here well it could be 
that investors are losing confidence in Japan’s financial health if that’s the case it’s 
no wonder why because spoiler alert Japan has the highest debt to GDP ratio of any developed market 
economy in the world at around 263% in 2023 the government had to spend 22% of its budget just 
to pay the interest on this colossal debt pile and unfortunately for Japan every slight 
increase in these longdated bond yields results in a massive increase in the amount of 
money the government has to spend paying interest on this existing debt as we’ll find out this has 
distorted monetary policy in Japan and left the BOJ in a very tight spot i’ll get to that in a 
minute but first what exactly has been going on in the bond market over there well the first thing 
that you should know is that the biggest buyer of JGBs is the BOJ itself it’s been buying around 120 
trillion yen or about 828 billion US worth of JGBs every year in a massive and prolonged exercise of 
quantitative easing better known as money printing to try and stimulate growth in Japan’s sleepy 
economy in fact so voracious has been the BOJ’s appetite that it now owns more than half of all 
outstanding JGBs but the situation has changed in recent years as inflation finally started to pick 
up it’s pretty ironic really for decades the BOJ fought tooth and nail to fend off deflation and 
all of a sudden it’s inflation that’s now biting the population in the backside inflation has been 
above the BOJ’s 2% target for 3 years straight now and reached as high as 3.6% this April and that’s 
why the BOJ is now trying to pull the lever back in the opposite direction it’s pivoting to a 
kind of a quantitive tightening light which in practical terms means reeling in the bond binges 
scaling back from around 120 trillion yen of annual purchases to a pace closer to 80 trillion 
yen and when the biggest richest spender in the market starts buying less prices inevitably slide 
at the same time another historically reliable source of demand is fading japanese pension funds 
and life insurance companies are facing regulatory changes and duration gaps that mean they have less 
capacity and desire to invest in long-dated JGBs but that’s not all in recent years foreign 
investors have stepped in pushing the share of JGBs in foreign ownership to above 10% which is 
quite high by historical standards and this is not necessarily great news for the BOJ because foreign 
investors tend to be a flightier crowd compared to Japan’s diamondhanded bond holders for example 
foreign investors tend to be more sensitive to US interest rate volatility speculation about 
Japan’s fiscal policy and the BOJ’s perceived ongoing doubbishness as such even modest selling 
from this cohort can have an outsized impact in Japan and this bearish cocktail led to some rather 
undignified scenes at JGB auctions in May with one particular sale of 20-year bonds recording the 
weakest demand since 1987 this was essentially the market saying thanks but no thanks to the terms on 
offer this deteriorating liquidity has reportedly caused the volatility of super long JGB yield to 
triple which is not a great look oh I didn’t see us financial services giant State Street 
recently published an analysis basically saying that there’s nothing to see here because 
grumblings from the market for JGBs are a sign of quote deteriorating market functionality driven 
by technical supply side imbalances rather than a fundamental reassessment of Japan’s fiscal 
sustainability however what State Street frames as quote marginal fiscal concerns is for some other 
observers not so easily dismissed a Japanese Prime Minister Shigeru Ishiba for one recently warned 
that Japan’s finances were quote worse than Greece which no offense to Greece didn’t exactly inspire 
confidence among JGB holders macro analyst and former Goldman Sachs trader Western Nakamura 
has been voicing a similarly pessimistic view he calls the JGB market itself the quote world’s 
most dangerous market and believes that long-end JGB yields ripping to record highs is the work 
of quote JGB vigilantes investors effectively punishing the government for not taking inflation 
or currency weakness seriously enough now since yields rising too much could cause a debt crisis 
the central bank would normally step in here to announce a rate hike although this makes it 
more expensive for the government to issue new short-term bonds it also signals to the market 
that the central bank is in control and indeed serious about tackling inflation and defending the 
currency and this should calm the market anchoring expectations for all future rates and thereby 
stabilizing the yield on the longdated bonds it’s like the central bank choosing to perform 
a painful but necessary surgery to prevent the patient from dying heck even the US Treasury 
has publicly pressured the BOJ to hurry up and raise rates but unfortunately in Japan’s case this 
rate hike surgery is likely to be a death sentence since the government’s debt burden is already so 
enormous a significant rate hike would result in interest payments so immense that they could 
trigger a fiscal crisis and bankrupt the state and this is why the BOJ is forced to keep its 
policy rate extraordinarily low and not make any sudden moves and you know what that means the 
yen carry trade continues the whole world is still borrowing yen and selling it for high yielding 
foreign assets to capture the delta resulting in enormous downward pressure on the value of the 
yen a weaker yen makes imports more expensive which is bad news for an island like Japan that 
relies heavily on imports of energy food and raw materials higher import costs are passed on 
to the consumer resulting in inflation and so we have bond market participants essentially 
forcing a showdown wherein the BOJ’s only move is one that weakens its own currency thereby 
importing inflation and to make matters worse since more than half of all outstanding JGBs are 
owned by the BOJ a rate hike would also nuke the value of the BOJ’s own bond portfolio potentially 
leading to enormous losses on its balance sheet this is what’s known as fiscal dominance where 
monetary policy is dictated by the government’s debt predicament rather than the central bank’s 
mandate to deal with inflation and unemployment now as you’ll recall the BOJ actually has 
been raising rates in an attempt at policy normalization the central bank last year hiked 
its official policy rate from minus0.1% to 0.25% and this was then raised to 0.5% in January 
a rate that remains in place at the time of making this video but this is still extremely 
low and true normalization seems like a pretty remote prospect at the moment governor UEA had 
reiterated that the central bank would not quote forcefully raise interest rates when underlying 
inflation is stalling i probably don’t need to remind you what happened the last time the BOJ 
hiked its policy rate against market expectations so in reality the BOJ is forced to keep rates low 
and keep hoovering up JGBs or at least not sell them aggressively to prevent a financial crisis 
to all intents and purposes the central bank is just monetizing government debt or in other words 
printing money to finance government spending it’s a structural vulnerability that continues to weigh 
heavily on the long-term prospects of the yen the BOJ is locked into maintaining an enormous 
balance sheet risking persistent inflation currency devaluation and terminal loss of its 
credibility it’s a situation that has only been made more tricky by the prospect of government 
spending rising further this year with inflation biting the Japanese consumer Tokyo is reportedly 
considering a cut to that to provide some relief ahead of July’s election and this is probably why 
the government also looks set to push back its own deadline for balancing the budget to 2026 recently 
the situation in Japan has started spilling over into another critical market namely the market for 
US government bonds remember how I said that Japan is the world’s largest creditor well this has made 
it the world’s largest holder of US government debt with Tokyo sitting on a trillion dollars 
worth of US treasuries historically Japan has been the biggest source of demand for US treasuries and 
this is why it’s a little alarming that Japanese investors have recently gone awall from US bond 
auctions and even started selling their holdings one of the reasons for this is that the BOJ has 
been hiking rates while the Fed has been cutting them and this has contributed to the USD JPY 
exchange rate becoming increasingly volatile of late and as a result it’s become prohibitively 
expensive for Japanese investors to hedge against currency swings for Japanese pension funds and 
life insurance firms who have historically sponged up as many treasuries as the US can throw at the 
market the yield on these US assets is now largely canceled out by the cost of insuring against the 
yen suddenly strengthening against the dollar so at a time when the US policy environment 
in Washington has cast doubt on the safe haven status of US government debt a major source of 
demand has also been priced out of the market by currency volatility and this looks like a 
confluence of the arguments made by Western Nakamura and he’s been warning of the prospect of 
failed bond auctions where investors are no longer interested in buying government debt and the 
whole fiat currency system starts to fall apart to be sure Nakamura doesn’t expect this to happen 
in some dramatic bond auction standoff but rather a slow decline in demand that is later recognized 
as the deathnull of the US dollar-based global financial system according to him recent bond 
auctions in Japan and the US being met with tepid demand may turn out to have been the canary in the 
coal mine and recently he’s made an interesting observation about how the price action of Bitcoin 
at times appears to mirror the yields on longdated JGBs both of which recently touched new all-time 
highs the matter of Bitcoin’s correlation with other assets is a little tricky because it seems 
to vary with sometimes it trading like a risk-on asset and at other times trading like a safe 
haven asset perhaps the most commonly observed correlation though is with US tech stocks 
like those tracked by the NASDAQ 100 index but Nakamura has found that as the correlation 
between Bitcoin and traditional risk assets like the NASDAQ 100 falls Bitcoin’s price has tended 
to move in tandem with the yields on long-term JGBs is it a coincidence maybe but maybe both 
assets are reacting to the same underlying global macro forces shifts in global liquidity 
persistent inflation expectations and maybe even a re-evaluation by investors of sovereign 
credit risk stress in the JGB market one of the world’s largest sovereign debt markets could be 
an indicator of fiat instability when yields on government bonds are soaring it implicitly calls 
into question the safe status of government debt and since Bitcoin has broken to new highs at 
the same time we may be witnessing investors derisking from government debt and seeking refuge 
in harder assets like Bitcoin if this is the case it would mark a notable shift from the August 5th 
carry trade unwind where we saw Bitcoin react into a liquidity crunch caused by a policy surprise as 
the most readily sailable major asset in the world Bitcoin tanked by 30% but promptly made a full 
recovery once the liquidation event had concluded this time however if Bitcoin continues trending 
upwards in tandem with JGB yields a sign of fiat stress it could indicate that both markets are 
pricing in a deeper more structural problem with the traditional financial system with Japan as a 
leading indicator if the JGB market experiences genuinely failed auctions where the Ministry of 
Finance can’t find enough buyers at acceptable yields the fallout could be very ugly indeed the 
BOJ’s solution might be to print yen on a massive scale to buy up unwanted debt which sounds like 
a recipe for hyperinflation and complete collapse of confidence in the currency another possibility 
is the government and BOJ might liquidate some of their US treasuries to stabilize domestic markets 
or fund emergency measures and the site of the world’s largest holder of US government debt panic 
selling it would likely have immediate and severe global repercussions all of this would likely 
drive demand for harder assets like Bitcoin and of course that is good news for its price but this 
is one of those bullish scenarios filed under the uh doomsday where the price of Bitcoin would 
probably be the least of our concerns on the other hand maybe this is a bit fanciful and 
maybe State Street will be proved right about there being nothing to see here except a technical 
hiccup in the bond markets you might want to keep an eye on the JGB BTC correlation though and since 
it’s always wise to consider a counterargument why not watch this video to find out why it actually 
may be Bitcoin that ends up collapsing this year and if you’re not subscribed to the channel yet 
well you can do that right over here this is me Nick signing off thank you very much for 
watching and I’ll see you guys again soon

Last year, a surprise rate hike from the Bank of Japan nuked financial markets the world over and sent BTC plunging 30%. But if you thought that was bad, Japan’s monetary woes might be about to spill over again for an Act II that could be much worse.

Tune in to find out why the market for Japanese government bonds could end up being the global fiat ponzi’s canary in the coalmine.

~~~~~

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– TIMESTAMPS –

0:00 Intro
0:36 Background
4:48 Act II: Bond Rout Reloaded
10:20 To Hike or Not to Hike
15:37 Bond Auctions Failing?

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📜 Disclaimer 📜

The information contained herein is for informational purposes only. Nothing herein shall be construed to be financial, legal or tax advice. The content of this video is solely the opinions of the speaker who is not a licensed financial advisor or registered investment advisor. Trading cryptocurrencies poses considerable risk of loss. The speaker does not guarantee any particular outcome.

#Japan #Macro #debt