“Richard Koo of Nomura is out with his latest piece and it focuses on one of the hottest topics, Japan. Richard Koo is worried about some of Japan’s policies and goes so far as to state about the countries Central Banker ‘Mr. Kuroda’s psychological tactic of repeating a lie often enough that it becomes the truth has succeeded brilliantly.’ Richard Koo also says that Japanese BOJ actions could causes losses equal to 7.5% of GDP! Below is the full report from Richard Koo titled Surge in long-term rates/talk of exit strategy highlight problems with quantitative easing.
Richard Koo on JGB Volatility
The surge in Japanese long-term interest rates between Friday, 10 May and Wednesday, 15 May probably caused some lost sleep among bond market participants and policymakers as the 10-year JGB yield climbed 34bp from 0.58% to 0.92% over the course of four days. Had this trend continued, it could well have marked the “beginning of the end” for the Japanese economy.
Fortunately, interest rates settled down that Wednesday and fell back below 0.8% at one point. But as of 20 May the 10-year yield is still trading at 0.84%, which is higher than it was the preceding Thursday. I suspect the rise in yields has left market participants and observers alike much more cautious for the first time in years.
Although the stock market has welcomed the yen’s continued slide against the dollar, this trend needs to be carefully monitored, as simultaneous declines in JGBs and the yen can be interpreted as a loss of faith in the Japanese government and the Bank of Japan. It is also worth noting that small-cap equities and REITs both fell in tandem with government bond prices during this period.
Overseas, meanwhile, a major debate on an exit from quantitative easing by the Fed and the Bank of England seems to be starting in the US and the UK. The IMF has also released a paper discussing the costs of this exit, and I expect the discussion to become more active going forward.
Further Reading Kyle Bass’ Latest Poll Tells Him Japan Will Implode
Richard Koo: Sharp rise in JGB yields despite BOJ easing is cause for concern….”
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