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Strategies & Market Trends : World Outlook -- Ignore unavailable to you. Want to Upgrade?

To: Les H who wrote (49252)	12/5/2025 8:09:59 AM
From: Les H	Read Replies (1) \| Respond to of 49743

Japan’s false Thatcher is blowing up a $12tn bond market *Opinion by Ambrose Evans-Pritchard* Japan is sailing dangerously close to the wind. The most indebted state in the world is taunting markets with one of the least justifiable plans for extra debt issuance. The fiscal irresponsibility is perhaps no worse than in America, France or Labour’s welfare Britain, but right now it is Japan that is in the sights of the bond vigilantes. Yields on Japanese debt have spiked wildly across the maturity curve since Sanae Takaichi took power six weeks ago and shocked investors with a “low quality” fiscal expansion of $135bn (£101bn), including such gems as rice vouchers and subsidies for fossil fuels – ploys to mask the inflationary consequences of her own policies. The scale of this populist misadventure is sending tremors through the international financial system, as well as horrifying the economic establishment in Tokyo. The benchmark 10-year bond yield jumped to 1.94pc in intraday trading in Tokyo, up from 1.79pc a week ago and a whisker shy of highs last seen in 1997. The speed of the move in the once-glacial $12tn market for Japanese public and private debt is almost frightening. Kawamura Sayuri, the chief economist at the Japan Research Institute, says the new prime minister risks a sudden loss of market confidence much like the Liz Truss episode if she does not back down. Debt service costs were already going parabolic even before the new government threw caution to the winds. “All signs point toward a fiscal reckoning,” she said. The yen should have strengthened at the prospect of so much stimulus hitting an economy already running at full employment and with no spare capacity. The normal pattern in a G7 country with an independent central bank is that big fiscal packages lead to higher interest rates, sucking in global capital. Yet the yen has continued to languish, even though the Bank of Japan has at last signalled it might start to do something about 3pc core inflation. The currency is still trading at extreme levels of ¥155 (£0.75) against the dollar, close to the weakest in real terms for over half a century. “Takaichi should humbly heed the market warnings,” said Takahide Kiuchi, from the Nomura Research Institute. The yen has decoupled from the Swiss franc and is no longer behaving as a safe-haven currency. It is behaving more like an emerging market currency; or like the pound after the Truss mini-Budget, when global investors dumped gilts and sterling simultaneously. Nomura’s Kiuchi said the government risks triggering a “Japan sell-off” across the whole gamut of assets. “Simmering worries about the worsening fiscal situation could escalate into a major crisis if they press ahead with a procyclical budget, setting off a triple decline in stocks, bonds, and the yen, with potential capital flight from Japan,” he said. Takaichi, Japan’s first female leader, presents herself as Asia’s Margaret Thatcher, and like the late Iron Lady she has little patience for other career women. She belongs to Nippon Kaigi, a nationalist nostalgia movement that fights feminism and harks back to the Samurai ideal of women as the anchor of home and family. Nippon Kaigi also thinks Japan should be applauded for trying to liberate Asia from European imperialism in the “Greater East Asia War” – ie, the full invasion of China in 1937 and the Second World War. It is a perspective that might surprise Westerners. We rarely acknowledge that Japan was revered by anti-colonial activists from Indonesia to India and Egypt after it sank the Russian fleet in 1905 and knocked the white man off his perch. The moral complexities are beautifully explored in Le Labyrinthe des égarés by the French-Lebanese author Amin Maalouf, which does not in any way justify what Japan did during the occupation of China. Takaichi seems not to know that Thatcher was a stickler for fiscal discipline, even to the point of pushing through a contractionary budget in the depths of recession in 1981. Takaichi’s smorgasbord of giveaways makes a mockery of Thatcherism. A turbulent Japan is a radically new state of affairs for global investors. For the past 30 years it has been a given that the yen would appreciate whenever there was trouble in the world, reflecting the role of the country as the world’s largest external creditor, funder-in-chief, and master of global liquidity. The Japanese would repatriate a slice of their vast holdings abroad during “risk-off” episodes, and throw the yen carry trade into violent reverse. The moves could be swift and powerful. The yen appreciated by 10pc in one day after Russia’s default and the collapse of the LTCM hedge fund in 1998. It doubled against sterling as the great recession went through its various stages, starting in Iceland in early 2007 and culminating with the US and European banking crash in late 2008. Almost nobody ever had to worry about Japanese debt. The country funded itself from its own domestic savings. Those who shorted Japanese bonds bled money on the “widow makers” trade. We might have to start paying more attention to Japanese debt now. It is extraordinary that the yen has weakened against the dollar even though the Federal Reserve is cutting rates and US job losses are mounting fast. Sayuri said the failure of the currency to respond to the narrowing of the US-Japan yield gap is a sure sign that investors are losing confidence in Japan’s “fiscal and monetary discipline”. She warned that the government may be forced to take drastic measures unseen since the stabilisation crisis in the late 1940s, such as a wealth tax and a freezing of bank deposits. “Fiscal consolidation must become an urgent national priority,” she said. The Takaichi government has instead abandoned Japan’s target for a primary budget surplus – akin to the UK’s chancellor abandoning the fiscal rule and letting rip. Some of the spending blitz is going on industrial policy – artificial intelligence, semiconductors, quantum technology, and shipbuilding – and will generate a return. Much is being squandered. Annual interest costs have been flat at around ¥10tn for almost 40 years. Near zero rates kept them pinned to the floor even as the debt ratio spiralled up to 260pc of GDP. The return of inflation has at last broken this unstable equilibrium. Yes, the debt ratio has since dropped to 230pc but that is an illusion of the denominator effect. The first burst of inflation has reduced the real burden of the debt stock. It is a one-off haircut for creditors. The retribution will come soon. Whether or not the Bank of Japan raises rates this month is almost academic. Markets suspect that the institution is already captured by the finance ministry. Investors are taking matters into their own hands and drastically repricing the cost of borrowing. Debt service costs are about to ratchet steeply higher as expiring bonds are rolled over at much higher interest rates. The International Monetary Fund expects interest payments to double by 2030 and quadruple by 2036, but that assumes an orderly market. Regime changes of this kind tend to be disorderly. Japan is still a major external creditor with $3.4tn of net assets – though Germany and China are now larger if you include the opaque offshore holdings of state banks. The yen may yet rally. But the long era of Japanese financial exceptionalism is over. We used to have to worry that the Japanese might at any moment pull hundreds of billions out of a jittery world, draining liquidity and reinforcing a firesale of global assets. Now we have to worry that events at home may force them to do so. Some say the critical line in the sand is 2pc on the 10-year bond. If so, we are close to the point where either Takaichi retreats or something, somewhere, will break. Japan’s false Thatcher is blowing up a $12tn bond market Thatcher had a good publicist. She squandered the trillion dollar bonanza called the North Sea oil. How Norway got rich from Oil, but the UK didn't - Economics Help