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Minyan Mailbag



Note: Our goal in Minyanville is to remove intimidation from the financial markets and encourage an interactive dialogue among the Minyanship. We share this next discussion with that very intent.

Dear Professor Succo,

Good morning...

Bloomberg is reporting the longest (11 consecutive days) decline in Japanese 10-yr bonds on record, since this data first started being recorded in Nov. '86.

I know that the yield is only 1.785, but as I recall, it was 0.40 at one point last year. What are the implications of this? I'm not sure, but maybe it is something that we ought to consider.

Have a great day,
Minyan Jeff Diamond

Banks, which represent the heart of the Japanese financial system, are much more susceptible to adverse movements in the Japanese bond market than they were several years ago. To make a long story short, Japanese banks used to own a lot more stocks than bonds; that position has now reversed as the government has worked to structurally change their capital markets (by forcing the banks to raise cash by selling equity).

The rise in rates in Japan can most likely be attributed to higher growth and, to a certain extent, can be viewed as a positive for their economy. But if rates continue to rise it may signal something quite different: they have their own debt problem there as government debt to GDP is running at 160%.

Higher rates in Japan make it much more difficult for the Ministry of Finance to continue to buy an inexhaustible amount of U.S. treasury debt. Banks have bought JGB's with the cash they have raised. As JGB's decline in price as yields rise, Japanese banks come under pressure to sell these bonds to maintain required capital ratios. The Ministry of Finance must then choose to re-liquify the market by either printing yen or buying JGB's. If they choose to buy JGB's without printing yen, they will have to sell U.S. bonds.

With so much U.S. debt now held by foreigners, especially the Japanese, our fate is highly correlated to their circumstances and how they decide to react to them. Unlike Mr. Greenspan or Mr. Snow, I view this as a dangerous situation.

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