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Looking at Japan's Government Bonds, We See the Land of the Setting Sun


There has been concern that the 20-year Japanese bond auction to be held on August 23 may roil the markets. Even if it doesn't, there is a crisis coming in the JGB market.

MINYANVILLE ORIGINAL As the number of people eligible for retirement payments increases, the Japanese Government Pension Investment Fund (GPIF) has been selling domestic government bonds, or JGBs. As reported by Bloomberg, "Payouts are getting bigger than insurance revenue, so we need to sell Japanese government bonds to raise cash," said Takahiro Mitani, president of the Government Pension Investment Fund.

Could this be the end of a long-running Keynesian experiment? Efforts to jump-start the Japanese economy have succeeded in raising the GDP growth rate over 2% in only five of the last 20 years; as a result, the debt to GDP ratio is 230% and rising.

Historically, the Japanese people have been avid savers, allowing the growing debt to be self-financed. That is all changing, as evidenced by the fact that the average Japanese household savings rate fell from some 17%-18% in 1980 to 7.3% in 2011. An aging Japanese population will put even more pressure on savings as the baby boomers retire.

The other source of savings - the non-financial corporations - peaked in 2003 and has been on the decline ever since. Meanwhile, government spending in the past five years has increased to nearly 10% of GDP. Since 2009, the overall savings rate has been negative to the GDP.

Japan now has one of the highest debt-to-GDP ratios in the world, even worse than that of Greece. Its savings rate is falling, and its fiscal situation is perhaps the worst in the developed world. If the sun isn't outright setting on its economy, it is certainly getting pretty dusky.

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Both the yen and the JGBs have strengthened since the Japanese stock implosion that started in early 2007. JGBs are thinly traded outside of Japan, so there is little technical information on them outside of the Japanese experience. However, there has been concern that the 20-year bond auction to be held on August 23 may roil the markets.

Leading up to the auction, the 20-year bond yield stood flat at 1.665%. Reuters recently reported that Japanese life insurers, the main buyers of 20-year maturities, would be reluctant to buy below a yield of 1.65%.

The rising Japanese yen may also be a symptom of the high internal savings rate and the cause of the decline in Japanese-based manufacturing, which was the powerhouse of the 1980s. Manufacturing has migrated from Japan to Southeast Asia, where the labor force is cheaper and regulations are fewer.

Auto manufacturing has even moved to the United States where the final product is assembled and sold.

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The Nikkei 225's (^N225) long decline from its high of 38,915.80 in December 1989 to its low of 7603.76 in April 2003 may have extinguished the attraction for equities among many of the citizens of Japan. The subsequent rally into February 2007 to 18,300.39 may have revived the hopes of Japanese investors, only to eradicate them again during the crash of 2008, when the Nikkei barely managed to stay above its 1982 low of 6849.80. [Editor's note: the Nikkei 225 closed today at 9131.74.]

Little wonder that there is attraction to JGBs, since the retracement out of the 2008 low was a minimal 39%. [Editor's note: For the 2012 Japanese Government Bond issuance plan, click here; for government guaranteed bonds (or JGBs), click here.] Since the sell-off during the Fukushima accident, the Nikkei 225 has spent the majority of its time in the lower half of its weekly cyclical trading band. The most recent retracement attempt has fallen short of its mid-cycle resistance and is losing upward momentum.

It is said that when everyone is looking at one thing, no one is really looking. With all eyes on every snippet of breaking news from the eurozone, very few are looking to the east to watch the Japanese sunset.

See more from Anthony M. Cherniawski at The Practical Investor, and more from Janice Dorn, M.D., Ph.D. at Trading With Art and Science.
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