I need lots of help. Someone please explain Japan to me. I do not understand.
After the March earthquake and tsunami, the Japan central bank printed truly epic amounts of yen. I can show the numbers if anyone wants them, but for purposes of this conversation, take my word for it. The amounts were huge, enormous. However, the yield on the 10 year JGB has remained pretty much fixed in the 1.00 - 0.9xx rate for a very long time. The printing did nothing to change this.
The Nikkei is presently in the same range as it was immediately after the 'quake, i. e., in the 8600 range.
The demographics are terrible.
The hard, cold data show that Japan is a mess, one big enormous hot stinking mess. It's JGBs, however, price it as if it were as fiscally and monetarily as solid as the British Empire in the 1850s.
How can this be?
How can this last?
What's going on?
Lots of people have thought this thought in the past two or so years and have gotten burned very nicely. Shorting the JGB is known as the widow maker trade.
In my view, this cannot remain the case. Is it time to short the JGB somehow or go long the Nikkei with a little vigorish?
Kyle Bass, a true believer in the coming catastrophe in JGBs has this to say:
fundmanagernews.com
With all of the evidence literally stacking up against Japan, a few members of some of the major political parties are beginning to discuss and plan for the ominously named “X-Day”. According to The Wall Street Journal and BusinessWeek, X-Day is the day the market will no longer willingly purchase JGBs. Planning is in the very early stages, but centers around having a set of serious fiscal changes that could be announced immediately with the intention of giving the Bank of Japan the cover they will need to purchase massive amounts of JGBs with money printed out of thin air. If the BOJ were to engage in this type of behavior, we believe the Yen would plummet against the basket of key world currencies which would in turn drive Japanese interest rates higher and further aggravate their bond crisis. Neither the Fed, the Bank of England nor the European Central Bank have been able to consistently suppress bond yields through purchases with printed money – the bigger the purchase, the greater the risk of a collapse in confidence in the currency and capital flight. No matter how they attempt to quell the crisis, no matter where they turn, they will realize that they are in checkmate |
