Tetchiness about Japanese bonds seems to be reaching an all-time high lately. But JGBs are not, so far, playing along. The Japanese parliament’s failure to raise the sales tax in the early hours of Wednesday didn’t do much to rattle Japanese bondholders, as the WSJ’s Real Time Japan blog notes. Strong domestic demand, and foreign buyers expecting that the yen might not remain at the lower rates seen over the last month are two reasons ventured. It’s what Andy Xie described this week as the wrong but self-fulfilling belief in the (perpetually) strong yen, in a lengthy piece about a looming crisis for the currency.
The yen has, nonetheless, seen something of a weakening recently, thanks to the BoJ’s Valentine’s Day intervention. And there is some optimism around Japan’s economic growth generally, though a lot of it relates to the post-tsunami rebuilding effort. Both the rebuilding and the weaker yen are cited as one of the reasons the Nikkei is performing relatively well this year and has returned to its pre-tsunami level.
Meanwhile, the higher energy imports necessitated by shutting down almost all the country’s nuclear reactors helped turn the trade balance negative for 2011, and is also weighing on Japan’s current account surplus. Which all probably helped net shorts against the yen in early March reach their highest level in five years, according to CFTC data.
Japan is of course enormously indebted and its sovereign funding requirements for this year are mind-bogglingly huge. So the likelihood of a debt crisis materialising sounds convincing — and yet the JGB yields remain low.
Christian Carrillo at Societe Generale says that will probably continue, and anyone shorting JGBs is going to have a difficult time, at least this year. The reason, SocGen says, is Japan’s net wealth actually rose in the last quarter of 2011, to ¥425tn or 90.1 per cent of GDP. Carrillo bases this on wealth by sector data from the BoJ:
The upturn in household wealth is interesting, he writes, because:
Given the recovery in risky assets in Q112, one should expect some slowing in deposit growth this quarter, but a sharp improvement in households’ ‘Shares and other equities’ valuations. This implies that Japan’s net wealth position will probably keep improving in Q112. Furthermore, the continued increase in households’ insurance and pension assets means that the overall level of ‘precautionary’ savings of Japanese households (cash, deposits, insurance and pension assets) reached an all time high of ¥1,259tn (269% of GDP) in Q411.
Another contributor was increased foreign indebtedness to Japan:
This is a surprise, given the large buying of JGBs and T-bills reported in JSDA monthly trading volume statistics. The main reason for the increase in Japan’s net assets vs foreigners was the ¥8.4tn in BoJ/MoF’s FX intervention in the previous quarter together with some fundraising by foreigners in Japan. These activities overwhelmed foreigner buying of JGBs and T-bills which, according to FoF data, amounted to only ¥1.2tn in Q411.
Carrillo says the JSDA data is, in short, unreliable, and that the BoJ’s Flow of Funds (FoF) data is more useful.
For example, JSDA’sfigures show heavy selling of Japanese T-bills by banks in FY2011, while BoJ FoF data shows nearly ¥14tn in net buying. The latter figure seems more reasonable considering that banks accumulated ¥21tn in deposit liabilities while their loan books rose by ¥5tn.
Anyway, for the reasons outlined above, when it comes to household wealth actually improving in a risk-on environment, he says that Japanese net wealth will continue to rise, too — at least, this year. Meaning those who are short JGBs are “chasing rainbows”. A bigger rise in yields down the track is not ruled out, and of course a big capital flight out of the country would mean all bets are off. Which is precisely the kind of thing that Xie is getting at.