Corporations use the yield on the10-year JGB as a guide to the yields on the bonds that they issue, in effect, the JGB yield plus a premium for the greater riskiness of corporate bonds. But, if the 10-year JGB is seen as being distorted--as evidenced by the kink, among other things--then the companies trying to issue bonds and the investors will split on the proper yield and the volume of bond issuance will be reduced. That's what's going on now.
This situation is not dissimilar to the issues in the US. The US has a federal government that has spent like crazy for the past couple of years -- this has caused significant inflation and the central bank has increased interest rates to pull that cash out of the system. Japan has an antiquated set of laws, rules and regulations that limit the opportunities of businesses and the BoJ is trying to offset these issues.
Richard has correctly pointed out that this is a very difficult problem to fix... especially if it is only the BoJ that is trying to do the heavy lifting. We aren't going to see prosperity return to Japan without significant changes in the legal system and regulation. Japan's issue are very long term.
I wonder if you have seen any commentary or analysis on the impact of rising rates on Japanese government budget. Apparently, BOJ is financing the government budget so that the government won't run out of cash, however, with the rising rate, the interest expense burden will increase.
It' won't have a big impact for a while because most of the gov't debt is longterm and so a rise in rates today won't affect it. just as important, more than half of the debt is owed to the BOJ, so the gov't is paying itself
"For technical reasons, a kink in the JGB yield curves causes serious distortions in the corporate bond market."
Could you maybe elaborate on this or share a link with the explanation? I would be curious about the mechanism behind that.
Corporations use the yield on the10-year JGB as a guide to the yields on the bonds that they issue, in effect, the JGB yield plus a premium for the greater riskiness of corporate bonds. But, if the 10-year JGB is seen as being distorted--as evidenced by the kink, among other things--then the companies trying to issue bonds and the investors will split on the proper yield and the volume of bond issuance will be reduced. That's what's going on now.
I see. Thank you for explaining.
This situation is not dissimilar to the issues in the US. The US has a federal government that has spent like crazy for the past couple of years -- this has caused significant inflation and the central bank has increased interest rates to pull that cash out of the system. Japan has an antiquated set of laws, rules and regulations that limit the opportunities of businesses and the BoJ is trying to offset these issues.
Richard has correctly pointed out that this is a very difficult problem to fix... especially if it is only the BoJ that is trying to do the heavy lifting. We aren't going to see prosperity return to Japan without significant changes in the legal system and regulation. Japan's issue are very long term.
I wonder if you have seen any commentary or analysis on the impact of rising rates on Japanese government budget. Apparently, BOJ is financing the government budget so that the government won't run out of cash, however, with the rising rate, the interest expense burden will increase.
It' won't have a big impact for a while because most of the gov't debt is longterm and so a rise in rates today won't affect it. just as important, more than half of the debt is owed to the BOJ, so the gov't is paying itself
Another great piece, Richard. Thank you so much.