Analysis of widespread problems with thinking on Japanese bond market

by admin on June 11, 2012

I was pleased to see this picture on Bloomberg a few days ago*, but the ideas about the bond market given here are typical of non-Japanese investors, in that they are weakly-composed and largely based on non-Japanese ideas.

Making a mental map model of his ideas, we can see that they are split into two processes. The first one is relatively reasonable, and looks something like this:

Japan bond mkt mental map 1

Japan bond mkt mental map 1

Most people will agree that this is likely. However, in the key paragraph Shilling says:

“A current-account deficit in Japan would have serious consequences because the country would be importing money, instead of exporting. And since this would probably occur in a moribund economy, few investment opportunities would attract foreign capital or encourage Japanese with foreign assets to sell them to bring the money home. So interest rates would need to rise appreciably from current low levels of less than 1 percent for 10-year Japanese government bonds.”

You can almost hear Schiller thinking “Wow! I’ve cracked it! Japan is Greece!”

From this point Schiller starts to get overexcited, and his mental map develops as follows:

Japan bond mkt mental map 2

Japan bond mkt mental map 2

This raises the questions of:

1. What exactly is “diminishing policy space”? Does it mean needing to go cap in hand to other countries to borrow in foreign currencies? Does it mean selling overseas assets, making the yen soar in value? Does it mean raising taxes by an insignificant amount? Or does it mean needing to just print more yen, making the yen fall value and having everyone in Japan happy?

2. What is the political reality of “contracting real economy”? Does it mean the government being forced to rein in spending, because it suddenly decides that it is profligate? Or is this a Western idea plastered over Japanese thinking? Is it not more likely that the Japanese government will try to keep all stakeholders happy, and the result will be monetization of debt, eventually leading to inflation?

As you can see in the inpatient way I have written these questions, I think there is more than one outcome possible, and the path of least resistance in Japan is to try to keep all stakeholders happy. Further, a decreasing yen will be good for exports, and will not cause the country to need to finance itself like Greece. Japan has its own printing press.

Here is an alternative mental map:

Jan Pstrokonski Japan bond mkt mental map

Jan Pstrokonski Japan bond mkt mental map

*NB: The original article can be found here:

{ 0 comments… add one now }

Leave a Comment

Previous post:

Next post: