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Ruth, what's it been like for you this past week?
If I can summon up in one word, it's manic.
Ruth Carson covers Asia's foreign exchange markets from Bloomberg. She says she was prepared for things to get a little busy Tuesday last week.
You had Trump threatening fresh Harris over Greenland. The US was on holiday the day before, so the world's biggest provider for liquidity and bonds was out. So there was this tense nervous air across all the trading desks in Asia. Now that said, I thought things were under control enough by mid morning on Tuesday for me to run out quickly to get some Singapore chicken rice class this street. I should have nine.
There was such a big risk. Absolutely, by the time she came back, the headlines started to roll in.
Japan's super long bonds showed record selling by insurers and picked up in quick succession. By three pm, the volcanoes suddenly erupted and my phone just started going ping, ping, ping, ping, pin, Pink pink. Japan Today, JGB thirty year yields up twenty five basis points.
And that's what's now feeding into global bond.
Markets, and now the yields here are up a twenty basis points to its highest level since the two thousand. The Japanese forty year rates top four percent, at the highest level since his debut in two thousand and seven. It wasn't just hot headlines that investors were just going, oh my god, what just happened.
The sudden selling in Japan's seven trillion dollar bond market sent tremors throughout global financial markets.
Well, treasuries join a global bond sell officet, rattling higher unsettling global fixed income markets. So it's not just fixed income, it's the Dollar hour as well. Today's Big Take looks at him.
A week after the meltdown, japan bond yields have settled somewhat, but Ruth says the bond market crashed last week signals a turning point for Japan.
You could always count under Japanese bond markets to be stable. You could always count under Japanese to be an anchor to global rates, But no longer. Interest rates are rising in Japan. The yen is so volatile it's ripping all the trading books apart. All of this is beyond volatility. It's a new regime for investing, and.
If the chaos continues, there are risks the ripples will reach ordinary Americans and consumers around the world.
This chaos is no longer a Japan problem. The chaos actually spread like wildfire into other markets, and that is why we are seeing authorities in the US and other places really stuff smarting to opine about the so called export shock Japan has to the world.
This is the Big Take Asia from Bloomberg News. I'm wanha. Every week we take you inside some of the world's biggest and most powerful economies and the markets, tycoons and businesses that drive this ever shifting region. Today, in the show, what's happening in Japan's bond market? Who wins or loses in the fallout, plus how ordinary Americans could be caught in the crosshairs. Before we get into what's happening in Japan's bond market, let's step back and look at how bond markets work.
In general.
Governments like the US or Japan sell bonds to borrow money. Those bonds have a fixed timeline and a set rate, say three percent for ten years. You buy the bond and the government pays you that three percent every single year, and once the ten years are up, they pay you back your initial investment in full. Now, when interest rates go up, the value of older bonds purchased at lower
rates goes down. For decades, Japan's interest rates were around zero percent, but in recent years that started to change.
If a particular central bank in this case, the Bank of Japan raises interest rates, suddenly your bond value drops because if the government sells more bonds at a current new rate, you'll get you get high income. So why would you want to hold the bond that you had before you lose value on it. Imagine if you're, you know, putting money into a bank deposit, and this bank promise you a three percent return on your safest investments ca every single month, you know you get a three percent
annualize income from them. But hey, all of a sudden, bang b is saying I'm going to give you four percent. Most people would go, oh, man, I'm out. I'm closing that account and I'm putting money into the one that's going to give me four percent.
Inflation has been rising in Japan since the pandemic, and in twenty twenty four, the Bank of Japan hiked interest rates for the first time in seventeen years. Since then the country's central bank has moved four times to fight inflation, pushing rates to their highest level in thirty years. Ruth walk us through the chaos of what happened on January twentieth, the day the Japanese bond sell off began. What was going through investors' minds.
Investors were already very nervous. In particular, there was already heightened tension around Japan because Prime Minister Sanai Takaichi had called for a snap election of February eighth, but there was also question marks around her fiscal stumulus. It was a cocktail of risks. It was a pressure cooker environment and something had to break. Then, at around twelve thirty pm in Tokyo, an auction for twenty year bonds had
come out. The results and the auction drew weaker demand than average, another bad sign for some of the riskiest Japanese debt out there. So, the longer maturity to debt, the riskier it is to buy the second death knell, if I can call it that. So, to put things to perspective, this is a seven trillion dollar plus bond market. It took only two hundred and eighty million dollars worth of trading to tip it into meltdown. That's just a fraction of the market, absolutely, So what does it tell you.
It tells you that liquidity is so short in supply, or perhaps the traits are just so small that it took just a little bit to tip the whole market into chaos.
On that point, I just wondered if you can elaborate, I mean, if you invest in the markets, you're used to volatility, But why is any sign of volatility in the Japanese market so surprising to investors?
So we go back to the idea of Japan began anchored to the world. Remember that for years, decades, even Japan had incredibly low interest rates. It was so boring and stable that even the ten year bond, which is often the most traded bond in any market in the world, there were days when there was no trading on tenure bonds. That's how boring and tempered it was, and stable and stable.
But no longer we know that the epicenter is Japan of this risk because the boj is pairing back its purchases of bonds at the same time, you've got the life insurance in Japan some of the do you get in the world. From what we're hearing in markets, they're not buying as much as they did because they're waiting. They're waiting for rates to go up higher, for bond us to go up higher before they come in to buy. And so there is that soul searching across every trader
out there in the world. It doesn't matter if you're in credit, stocks, bonds, currency, if you no longer have that backstop, what do you do now?
How did this melt down impact the biggest stakeholders in Japan's bond market? You know, who are the winners and losers of what's happening so far?
The percentage of Japanese owners of japan government dat is very, very high. It's over eighty percent. So if you're a life insuran in Japan, for instance, and for years you've hoovered up all these bonds and they're now paying you a fraction in interest, you're sitting on a lot of losses. But the beauty about these insurers is that they can hold they don't have to day trade, so to speak.
There would have been money managers you know your traditional funds, big funds, foreign funds who would have been playing in the JGB market. A lot of them would have taken a hit with the ferocity of the move. Some would have made a lot of money as well. Hedge funds, for instance, if they had seen the dislocation, they might have bought, for example, when yields just skyrocketed, because that means bonds were so cheap, they would have gone this
is crazy, this is nuts. I've got a buck to make here, and it would have bought it at the top when it comes to the yeal spike, and even if they sold it today they would have made money.
Now, how is the government responding to the smeltdown so far?
Well, if I can be candid, there seems to be a shout out to markets to just calm your socks down. You know, we've seen the Finance minister come out to say calm down, guys were watching you. On the bond side, we saw the Bank of Japan Governor Kuzua Uerda actually saying that their will moved calm bond. In other words, they will buy if needed to come volatility because they know what's at stake here. It's no longer a Japan story, It's a world story.
And what about the reaction of governments around the world.
It's been unprecedented to see, for instance, Scott percent coming out to speak about volatility in Japan. It's definitely gotten people worried. It is the topic of discussion across Asia, New York London trading desks. How severe is this problem that even the US side is now getting involved. And importantly, remember when it comes to currencies, it's never one sided,
it's always two players at a game. It sounds a very very strong signal about how you position even under dollar, So it's no longer a Japan problem.
Earlier this month, Japan's Prime Minister of Sanaiatakiichi surprise markets by calling a snap election and doubling down on plans for a massive stimulus package. What that means for Japan, a country in so much debt, and what's at stake for everyone else that's after the break. Trust is the lifeblood of a bond market. When investors trust a government and believe it can manage his debt responsibly, they lend it money cheaply. But when that trust falters, the dynamics shift.
Investors start demanding higher rates of return, essentially more interest to offset what they believe is a greater risk that the country might not pay back its debt.
It's a vote of confidence in Japan essentially that they are getting things very, very wrong on the policy side.
Still, Bloomberg's Ruth Carson says, for Japan, the bond market crash last week wasn't just a financial event, It was a crack in investors trust. The Japanese government has relied heavily on borrowing for decades, trying to lift the country out of its so called last decade of stagnation, but markets have grown increasingly skeptical about Japan's ability to manage its towering debt.
Japan is the most indetonation on Earth in terms of developed markets debt GDP over two hundred percent. The fiscal situation, if you ask any bon investor out there, was tenuous to say the least.
And adding fuel to this fire is Japan's new Prime Minister, Sanai Takichi.
Takaichi has came out to say, we want to stimulate the economy. We want to make sure that growth continues. You know, the lost decades are truly behind us. We want to make sure that we target that, and her policies, on top of everything else, are popular. Takaichi pledged to cut eight percent ta IS on food and non alcoholic beverages for two years.
That's roughly thirty two billion dollars in last tax revenue, or about six percent of what the country collects in taxes annually.
The problem was she didn't clarify how she would pay for it, and that ticked investors off. So what does that mean? It means that the government is spending a lot more at a time when inflation is already running hot four years mind you above the J'S target. And remember that bond investors don't like inflation because it eats into their income what they received from the bonds in this case jgb's.
It sounds like the fiscal situation in Japan has been really rocky. Now you've got Takiji calling for a snap election next month and the cut on food sales tax proposal too. What's the thinking on why she's doing this?
So I think you need to unpack both on a political front and the economic front. She's winning votes, her popularity is high. People like it. They want more money in their bank account. Cost of living is so high you want to address that in your pocket and worry about everything else later. The expectations are that she's actually going to entrench power. If you're going to entrench power,
it's much harder to get rid of you. Even if markets are signaling they're not happy with your policies, You've got people support, and ultimately you're the leader of your country, not bond markets.
Global investors are closely watching, obviously how the Japanese bonds and the moves there are going to spill over into other markets. I wonder if you can just walk me through how global markets are impacted by this.
Every time jgbs sell off, there's going to be waves ripple the facts and then waves to other parts of the world. Remember that bond markets dictate borrowing costs for governments around the world through to even our own mortgages. The impact can be astronomical. Beyond the bond market, borrowing costs obviously impact the balance sheets of corporates, bangs, miners, insurers, telecoms,
AI companies. They need to borrow, and these people will be looking at their balances going goodness me, suddenly borrowing costs are going up a lot higher. That means I need to raise how much I will pay in yield, how much I will pay an income as well to entice people to buy my debt. So suddenly they have to pay a lot more in interest too. So it starts like a small seed in some aspects, even though
it's a seven trillion dollar market. But then it can quickly go into a forest fire, very very quickly, and happen over night too.
But just because Japan's vulnerable to forest fire doesn't mean it lacks the means to put out a blaze. The country may owe a lot at home, but Japanese investors like banks, pension funds, and insurers are sitting on a massive pile of overseas assets over three point seven trillion dollars at the end of twenty twenty four. That includes a lot of American government bonds.
At what point do you, the Japanese some league, wake up and say, hold on, our markets are actually great. Y'lls have gone up enough now for us to just sell our overseas assets and bring the money back home and invest in our own assets. Japan is the biggest holder of the US treasuries market from a foreign investors perspective, with over a trillion, I think it's about one point
two trillion that they have. Imagine if they sold a fraction of that, and I'm not suggesting that they do, but if a bit of that money came home, the snapback would be incredible. The yen would strengthen like crazy. Jgbs would be in demand.
Now it's been roughly a week since all of this started. Where are Japanese bonds yields? This week?
Things have calmed down a little bit. But if I can use the analogy of running a race last week was sprint. Everyone was running as fast as they could, as hard as they could to either minimize losses or make a profit. Yes, things have come down, but they are still running, so it's not a job. People are still on such tenter hooks as to what could happen next. They're ready with firepower if needed, whether to short Japanese government bonds or to buy Japanese government bonds. They're listening
to the authorities. But the mood it's far from calm. Everyone is still very much on edge. We still have the February eighth election coming up. So if you want to ask for a window as to when things can sort of pick up again. Look anyway from tomorrow through to the election. Take a pic, because all it takes is a spock from just a matchstick. The Ambas are still there.
This is The Big Take Asia from Bloomberg News. I'm wanha. To get more from The Big Take and unlimited access to all of Bloomberg dot Com, subscribe today at Bloomberg dot com slash podcast Offer. If you liked the episode, make sure to subscribe and review The Big Take Asia wherever you listen to podcasts. It really helps people find the show. Thanks for listening. To see you next time.