#114: Japanese Bonds

S2N Spotlight

The Japanese yen and its interest rates are a big story; let me try to convey why.

Japan is the most indebted government in the world, with a debt-to-GDP ratio of over 260%. To finance that debt, they have a very large bond market. For decades, the Bank of Japan experimented with a zero-interest rate policy, which weakened its currency. Over the last 5 years, the yen has weakened dramatically. As Japan imports a lot of goods, the weaker currency is having an inflationary impact. To protect the currency, there have been 2 rate hikes this year, the first since 2007. Yesterday was its second and has dramatically strengthened the currency. Now for the interesting stuff.

Foreigners have been increasingly buying Japanese Government Bonds (JGB’s) over the last 10 years, currently sitting at 13.5%. In the chart below, you can see how their investment in JGB’s in yen and dollars compares. It has been a horrible investment for foreigners when adjusting for dollars; see the green line.

For the Japanese, who are big savers, they have done reasonably well buying their own JGPs, considering there is such a low interest rate environment. Shorting the JGBs has been called the widow-maker trade.

Let us look at it from the other side, which is what I wanted to focus on today. The Japanese invest over $1.1 trillion in US Government Treasuries and around $500 billion in European bonds. If you look at the blue line, that is what their US investment has done in dollars. However, the weaker yen against the dollar has given their investment a significant boost. The question now is: if the yen continues to strengthen, will the Japanese rather invest more in their own bond market, thus putting pressure on the US bond market?

I don’t currently have a strong view on this, but I think it is very important to keep showing these currency-adjusted bond returns, as the bond market is really the oil that greases the economic engines of the world.

S2N Observations

The Fed didn’t cut rates yesterday, with Chairman Powell not giving any guidance for September’s FOMC meeting, saying that they will be guided by the data. Stocks had a particularly strong day, with the S&P 500 bouncing off its upward-sloping trendline.

Starbucks reported a drop in revenue for Q2 of 6% in the US, 7% internationally, and a 14% drop in China. I take this as a clear indication that the retail consumer is tightening its belt with fewer bought-out coffees, a luxury that even the poor have indulged in over the years.

This is a new chart of mine where I take job openings in the non-farm sector (JOLTs) by the thousands and divide it by the unemployment in people, not %. You can see that we are now back at the same ratio we were prior to the COVID pandemic.

Crowdstrike, the cyber security firm that caused a global internet meltdown 2 weeks ago, is trading down 40% from its highs.

I shared the Bloomberg Commodity Index yesterday. I received some feedback on the index, so I did a little bit more homework. It is a lot weaker than the Refinitiv Commodity Index, which emphasises the importance of understanding the weightings of the respective indexes before drawing conclusions. I learn something new every day.

The entire world measures the Olympic Medal Leaderboard, like the one I have shared below. It really is all about gold medals. The USA is currently in 7th place. However, on all the major USA TV networks and print media, the Leaderboard is scaled according to total medals. The USA values all medals the same (clearly not true); it is also the largest team by number, thus increasing their odds of leading the medal tally according to their method. Patriotic pride will torture statistics mercilessly to pursue one’s agenda.