Olivier Blanchard Joins The Japan Is Doomed! Crowd

Olivier Blanchard (ex-Chief Economist of the IMF) has been quoted argument that the Japanese confront serious macro risks; inwards reality, likely the biggest economical hazard Nihon faces is listening to New Keynesian economists. Ambrose Evans-Pritchard, of the Telegraph, summarised Blanchard's comments at a coming together at Lake Como equally "Higher Bond Yields Means ... Lower Bond Yields?").

We cannot generate equally useful a nautical chart for Japan, since at that topographic point was no issuance of long-dated bonds until later the high inflation menstruum of the 1970s. The article "Higher Debt-To-GDP Ratios And Lower Bond Yields: Japanese Experience" discusses the to a greater extent than express Japanese information set.

Furthermore, raising involvement rates to response to higher inflation rates is correct out of the New Keynesian playbook. When bond yields inwards the USA did non ascension during the 2000s inwards response to Fed charge per unit of measurement hikes, it caused widespread hand-wringing with New Keynsians ("the Conundrum"). (As I verbalize over inwards my upcoming written report Interest Rate Cycles, this should non lead maintain been a surprise.) In other words, rising bond yields is just what is expected to occur during a tightening cycle, too thence why brand a large bargain almost it?

Those Darned Retirees And Hedge Funds

Returning to what Blanchard said.

To our surprise, Japanese retirees lead maintain been willing to concur authorities debt at zippo rates, but the marginal investor volition before long non live on a Japanese retiree, [...]
If too when U.S. of A. hedge funds popular off the marginal [buyer of[ Japanese debt, they are going to inquire for a substantial spread, 

Anyone who thinks that hedge funds have the residue canvas capacity to "fund" a G7 nation does non sympathise how fiscal markets are organised. There has been a parade of hedge funds shorting the JGB marketplace (directly or indirectly) for decades, too the negative yields on JGB's tells you lot how good those trades worked out. To what extent hedge funds thing inwards developed province fixed income, they create upwards one's withdraw heed pricing for relative value trades. (Until their lack of residue canvas capacity causes them to blow up, equally nosotros saw inwards practically every fixed income marketplace inwards 2008.)

Why lead maintain retirees been buying Japanese bonds? Simply, they are rich. Asking when "retirees" volition halt buying authorities bonds makesas much feel equally cry for when "rich people" volition halt buying authorities bonds. Given that the European Left has been complaining almost the rentier storey too their bond-buying for centuries (Thomas Piketty existence the latest high profile example), this situation is unlikely to alter whatsoever fourth dimension soon.

Talking almost "marginal buyers" is but an endeavor to fool people with economical jargon. The buyers that create upwards one's withdraw heed the storey of bond yields are Japanese banks too Japanese institutional investors, Those investors are e'er balancing the attractiveness of JGB's versus yen hazard assets too unusual currency assets. Since those institutional investors lead maintain yen-denominated liabilities, at that topographic point is no adventure that they volition abandon the yen involvement charge per unit of measurement market.

Finally, given the huge overhang of Japanese holdings of unusual currency debt (including Japanese official reserves), it volition live on a long fourth dimension earlier non-Japanese investors volition dominate the valuation of the yen.

Concluding Remarks

The most interesting business office of this bailiwick is the next -- what is it almost Nihon that compels western economists to brand upwards scare stories? How many decades volition it accept earlier people tin figure out that a debt-to-GDP ratio over 100% is perfectly sustainable inwards a floating currency regime?

(c) Brian Romanchuk 2015