Japan Creates A Negative Feedback Loop In JGBs And Yen

Includes: JGBD, JYN
by: Tres Knippa


For my readers who do not read Japanese, the phrase above says " NEGATIVE FEEDBACK LOOP." It is an appropriate title because it appears the Japanese are caught in a very nasty negative feedback loop and it is all by the design of Prime Minister Shinzo Abe and the Bank of Japan. The world is getting a first-hand lesson in the law of unintended consequences.

Japanese Economic Minister Akira Amari said on Tuesday that "the government and the Bank of Japan would continue to make efforts to reduce volatility in the Japanese government bond market." This comes as the yield on the 10-year bond in Japan has surged 45% in a matter of days.

Let's take a moment to think about this. On April 4, the Bank of Japan announced a plan to buy $ 80M in Japanese bonds per month. The idea here would be to weaken the yen and the Japanese would all live happily ever after. What the Bank of Japan and many other traders did not stop to think about was what current bond holders might think about this plan. If I am a bond holder and the government announces it intends to trample the yen, then why would I hold that security? Why would I let the government pay me back in devalued currency? What has the market done on the announcement that the BOJ is going to buy massive amounts of Japanese debt and double the Japanese money supply…the bond market has gone DOWN. Not to worry says Minister Amari. The BOJ and the Japanese government will step in to calm markets down. Calm the markets? By doing what exactly? The BOJ has one tool at its disposal - print more yen and buy more bonds. The negative feedback loop appears to exist in Japan because the only tool at the disposal of the BOJ serves to weaken the yen further. As the yen weakens, so does the bond market. Rinse and repeat.


It is the actions of the government and the BOJ that started the bond weakness in the first place. To me, it appears the Japanese have snapped the trap on themselves. Prime Minister Shinzo Abe is riding a popularity surge as the Nikkei races higher but the Japanese electorate knows not what it votes for. Why would the Japanese vote to have their currency destroyed, their import costs rise, and their savings wiped out? In my opinion this is exactly what shall be the fate of Japan. The recent action in the Japanese government bond market should also serve as an important lesson to those who think a country is immune to pressures in its bond market as long as it can print its own currency and buy its own debt. The MMT crowd should be wringing its hands right about now.

The world should also be very aware of Shinzo Abe's plan to change the constitution to militarize Japan. When things get really bad, which I think they will, the Japanese leadership will conjure up a grand enemy to pick a fight with to distract the populace and engorge the Japanese sense of nationalism. The shame of the situation is that the enemy is actually 20 years of bad decisions…but politicians are not very good at bombing bad decisions.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in JGBD, YCS over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Tres Knippa is a trader on the floor of the CME and is an owner of Kenai Capital Management which seeks to profit from what he believes is the coming debt crisis in Japan. Tres also owns ShortJapanDebt.com

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