Speaker 1: Bloomberg Audio Studios, Podcasts, Radio News.
Speaker 2: Ruth, what's it been like for you this past week?
Speaker 1: If I can summon up in one word, it's manic.
Speaker 2: Ruth Carson covers Asia's foreign exchange markets from Bloomberg. She
Speaker 2: says she was prepared for things to get a little
Speaker 2: busy Tuesday last week.
Speaker 1: You had Trump threatening fresh Harris over Greenland. The US
Speaker 1: was on holiday the day before, so the world's biggest
Speaker 1: provider for liquidity and bonds was out. So there was
Speaker 1: this tense nervous air across all the trading desks in Asia.
Speaker 1: Now that said, I thought things were under control enough
Speaker 1: by mid morning on Tuesday for me to run out
Speaker 1: quickly to get some Singapore chicken rice class this street.
Speaker 1: I should have nine.
Speaker 2: There was such a big risk. Absolutely, by the time
Speaker 2: she came back, the headlines started to roll in.
Speaker 1: Japan's super long bonds showed record selling by insurers and
Speaker 1: picked up in quick succession. By three pm, the volcanoes
Speaker 1: suddenly erupted and my phone just started going ping, ping, ping, ping, pin,
Speaker 1: Pink pink. Japan Today, JGB thirty year yields up twenty
Speaker 1: five basis points.
Speaker 2: And that's what's now feeding into global bond.
Speaker 1: Markets, and now the yields here are up a twenty
Speaker 1: basis points to its highest level since the two thousand.
Speaker 1: The Japanese forty year rates top four percent, at the
Speaker 1: highest level since his debut in two thousand and seven.
Speaker 1: It wasn't just hot headlines that investors were just going,
Speaker 1: oh my god, what just happened.
Speaker 2: The sudden selling in Japan's seven trillion dollar bond market
Speaker 2: sent tremors throughout global financial markets.
Speaker 1: Well, treasuries join a global bond sell officet, rattling higher
Speaker 1: unsettling global fixed income markets. So it's not just fixed income,
Speaker 1: it's the Dollar hour as well. Today's Big Take looks
Speaker 1: at him.
Speaker 2: A week after the meltdown, japan bond yields have settled somewhat,
Speaker 2: but Ruth says the bond market crashed last week signals
Speaker 2: a turning point for Japan.
Speaker 1: You could always count under Japanese bond markets to be stable.
Speaker 1: You could always count under Japanese to be an anchor
Speaker 1: to global rates, But no longer. Interest rates are rising
Speaker 1: in Japan. The yen is so volatile it's ripping all
Speaker 1: the trading books apart. All of this is beyond volatility.
Speaker 1: It's a new regime for investing, and.
Speaker 2: If the chaos continues, there are risks the ripples will
Speaker 2: reach ordinary Americans and consumers around the world.
Speaker 1: This chaos is no longer a Japan problem. The chaos
Speaker 1: actually spread like wildfire into other markets, and that is
Speaker 1: why we are seeing authorities in the US and other
Speaker 1: places really stuff smarting to opine about the so called
Speaker 1: export shock Japan has to the world.
Speaker 2: This is the Big Take Asia from Bloomberg News. I'm wanha.
Speaker 2: Every week we take you inside some of the world's
Speaker 2: biggest and most powerful economies and the markets, tycoons and
Speaker 2: businesses that drive this ever shifting region. Today, in the show,
Speaker 2: what's happening in Japan's bond market? Who wins or loses
Speaker 2: in the fallout, plus how ordinary Americans could be caught
Speaker 2: in the crosshairs. Before we get into what's happening in
Speaker 2: Japan's bond market, let's step back and look at how
Speaker 2: bond markets work.
Speaker 1: In general.
Speaker 2: Governments like the US or Japan sell bonds to borrow money.
Speaker 2: Those bonds have a fixed timeline and a set rate,
Speaker 2: say three percent for ten years. You buy the bond
Speaker 2: and the government pays you that three percent every single year,
Speaker 2: and once the ten years are up, they pay you
Speaker 2: back your initial investment in full. Now, when interest rates
Speaker 2: go up, the value of older bonds purchased at lower
Speaker 2: rates goes down. For decades, Japan's interest rates were around
Speaker 2: zero percent, but in recent years that started to change.
Speaker 1: If a particular central bank in this case, the Bank
Speaker 1: of Japan raises interest rates, suddenly your bond value drops
Speaker 1: because if the government sells more bonds at a current
Speaker 1: new rate, you'll get you get high income. So why
Speaker 1: would you want to hold the bond that you had
Speaker 1: before you lose value on it. Imagine if you're, you know,
Speaker 1: putting money into a bank deposit, and this bank promise
Speaker 1: you a three percent return on your safest investments ca
Speaker 1: every single month, you know you get a three percent
Speaker 1: annualize income from them. But hey, all of a sudden,
Speaker 1: bang b is saying I'm going to give you four percent.
Speaker 1: Most people would go, oh, man, I'm out. I'm closing
Speaker 1: that account and I'm putting money into the one that's
Speaker 1: going to give me four percent.
Speaker 2: Inflation has been rising in Japan since the pandemic, and
Speaker 2: in twenty twenty four, the Bank of Japan hiked interest
Speaker 2: rates for the first time in seventeen years. Since then
Speaker 2: the country's central bank has moved four times to fight inflation,
Speaker 2: pushing rates to their highest level in thirty years. Ruth
Speaker 2: walk us through the chaos of what happened on January twentieth,
Speaker 2: the day the Japanese bond sell off began. What was
Speaker 2: going through investors' minds.
Speaker 1: Investors were already very nervous. In particular, there was already
Speaker 1: heightened tension around Japan because Prime Minister Sanai Takaichi had
Speaker 1: called for a snap election of February eighth, but there
Speaker 1: was also question marks around her fiscal stumulus. It was
Speaker 1: a cocktail of risks. It was a pressure cooker environment
Speaker 1: and something had to break. Then, at around twelve thirty
Speaker 1: pm in Tokyo, an auction for twenty year bonds had
Speaker 1: come out. The results and the auction drew weaker demand
Speaker 1: than average, another bad sign for some of the riskiest
Speaker 1: Japanese debt out there. So, the longer maturity to debt,
Speaker 1: the riskier it is to buy the second death knell,
Speaker 1: if I can call it that. So, to put things
Speaker 1: to perspective, this is a seven trillion dollar plus bond market.
Speaker 1: It took only two hundred and eighty million dollars worth
Speaker 1: of trading to tip it into meltdown. That's just a
Speaker 1: fraction of the market, absolutely, So what does it tell you.
Speaker 1: It tells you that liquidity is so short in supply,
Speaker 1: or perhaps the traits are just so small that it
Speaker 1: took just a little bit to tip the whole market
Speaker 1: into chaos.
Speaker 2: On that point, I just wondered if you can elaborate,
Speaker 2: I mean, if you invest in the markets, you're used
Speaker 2: to volatility, But why is any sign of volatility in
Speaker 2: the Japanese market so surprising to investors?
Speaker 1: So we go back to the idea of Japan began
Speaker 1: anchored to the world. Remember that for years, decades, even
Speaker 1: Japan had incredibly low interest rates. It was so boring
Speaker 1: and stable that even the ten year bond, which is
Speaker 1: often the most traded bond in any market in the world,
Speaker 1: there were days when there was no trading on tenure bonds.
Speaker 1: That's how boring and tempered it was, and stable and stable.
Speaker 1: But no longer we know that the epicenter is Japan
Speaker 1: of this risk because the boj is pairing back its
Speaker 1: purchases of bonds at the same time, you've got the
Speaker 1: life insurance in Japan some of the do you get
Speaker 1: in the world. From what we're hearing in markets, they're
Speaker 1: not buying as much as they did because they're waiting.
Speaker 1: They're waiting for rates to go up higher, for bond
Speaker 1: us to go up higher before they come in to buy.
Speaker 1: And so there is that soul searching across every trader
Speaker 1: out there in the world. It doesn't matter if you're
Speaker 1: in credit, stocks, bonds, currency, if you no longer have
Speaker 1: that backstop, what do you do now?
Speaker 2: How did this melt down impact the biggest stakeholders in
Speaker 2: Japan's bond market? You know, who are the winners and
Speaker 2: losers of what's happening so far?
Speaker 1: The percentage of Japanese owners of japan government dat is very,
Speaker 1: very high. It's over eighty percent. So if you're a
Speaker 1: life insuran in Japan, for instance, and for years you've
Speaker 1: hoovered up all these bonds and they're now paying you
Speaker 1: a fraction in interest, you're sitting on a lot of losses.
Speaker 1: But the beauty about these insurers is that they can
Speaker 1: hold they don't have to day trade, so to speak.
Speaker 1: There would have been money managers you know your traditional funds,
Speaker 1: big funds, foreign funds who would have been playing in
Speaker 1: the JGB market. A lot of them would have taken
Speaker 1: a hit with the ferocity of the move. Some would
Speaker 1: have made a lot of money as well. Hedge funds,
Speaker 1: for instance, if they had seen the dislocation, they might
Speaker 1: have bought, for example, when yields just skyrocketed, because that
Speaker 1: means bonds were so cheap, they would have gone this
Speaker 1: is crazy, this is nuts. I've got a buck to
Speaker 1: make here, and it would have bought it at the
Speaker 1: top when it comes to the yeal spike, and even
Speaker 1: if they sold it today they would have made money.
Speaker 2: Now, how is the government responding to the smeltdown so far?
Speaker 1: Well, if I can be candid, there seems to be
Speaker 1: a shout out to markets to just calm your socks down.
Speaker 1: You know, we've seen the Finance minister come out to
Speaker 1: say calm down, guys were watching you. On the bond side,
Speaker 1: we saw the Bank of Japan Governor Kuzua Uerda actually
Speaker 1: saying that their will moved calm bond. In other words,
Speaker 1: they will buy if needed to come volatility because they
Speaker 1: know what's at stake here. It's no longer a Japan story,
Speaker 1: It's a world story.
Speaker 2: And what about the reaction of governments around the world.
Speaker 1: It's been unprecedented to see, for instance, Scott percent coming
Speaker 1: out to speak about volatility in Japan. It's definitely gotten
Speaker 1: people worried. It is the topic of discussion across Asia,
Speaker 1: New York London trading desks. How severe is this problem
Speaker 1: that even the US side is now getting involved. And importantly,
Speaker 1: remember when it comes to currencies, it's never one sided,
Speaker 1: it's always two players at a game. It sounds a
Speaker 1: very very strong signal about how you position even under dollar,
Speaker 1: So it's no longer a Japan problem.
Speaker 2: Earlier this month, Japan's Prime Minister of Sanaiatakiichi surprise markets
Speaker 2: by calling a snap election and doubling down on plans
Speaker 2: for a massive stimulus package. What that means for Japan,
Speaker 2: a country in so much debt, and what's at stake
Speaker 2: for everyone else that's after the break. Trust is the
Speaker 2: lifeblood of a bond market. When investors trust a government
Speaker 2: and believe it can manage his debt responsibly, they lend
Speaker 2: it money cheaply. But when that trust falters, the dynamics shift.
Speaker 2: Investors start demanding higher rates of return, essentially more interest
Speaker 2: to offset what they believe is a greater risk that
Speaker 2: the country might not pay back its debt.
Speaker 1: It's a vote of confidence in Japan essentially that they
Speaker 1: are getting things very, very wrong on the policy side.
Speaker 2: Still, Bloomberg's Ruth Carson says, for Japan, the bond market
Speaker 2: crash last week wasn't just a financial event, It was
Speaker 2: a crack in investors trust. The Japanese government has relied
Speaker 2: heavily on borrowing for decades, trying to lift the country
Speaker 2: out of its so called last decade of stagnation, but
Speaker 2: markets have grown increasingly skeptical about Japan's ability to manage
Speaker 2: its towering debt.
Speaker 1: Japan is the most indetonation on Earth in terms of
Speaker 1: developed markets debt GDP over two hundred percent. The fiscal situation,
Speaker 1: if you ask any bon investor out there, was tenuous
Speaker 1: to say the least.
Speaker 2: And adding fuel to this fire is Japan's new Prime Minister,
Speaker 2: Sanai Takichi.
Speaker 1: Takaichi has came out to say, we want to stimulate
Speaker 1: the economy. We want to make sure that growth continues.
Speaker 1: You know, the lost decades are truly behind us. We
Speaker 1: want to make sure that we target that, and her policies,
Speaker 1: on top of everything else, are popular. Takaichi pledged to
Speaker 1: cut eight percent ta IS on food and non alcoholic
Speaker 1: beverages for two years.
Speaker 2: That's roughly thirty two billion dollars in last tax revenue,
Speaker 2: or about six percent of what the country collects in
Speaker 2: taxes annually.
Speaker 1: The problem was she didn't clarify how she would pay
Speaker 1: for it, and that ticked investors off. So what does
Speaker 1: that mean? It means that the government is spending a
Speaker 1: lot more at a time when inflation is already running
Speaker 1: hot four years mind you above the J'S target. And
Speaker 1: remember that bond investors don't like inflation because it eats
Speaker 1: into their income what they received from the bonds in
Speaker 1: this case jgb's.
Speaker 2: It sounds like the fiscal situation in Japan has been
Speaker 2: really rocky. Now you've got Takiji calling for a snap
Speaker 2: election next month and the cut on food sales tax
Speaker 2: proposal too. What's the thinking on why she's doing this?
Speaker 1: So I think you need to unpack both on a
Speaker 1: political front and the economic front. She's winning votes, her
Speaker 1: popularity is high. People like it. They want more money
Speaker 1: in their bank account. Cost of living is so high
Speaker 1: you want to address that in your pocket and worry
Speaker 1: about everything else later. The expectations are that she's actually
Speaker 1: going to entrench power. If you're going to entrench power,
Speaker 1: it's much harder to get rid of you. Even if
Speaker 1: markets are signaling they're not happy with your policies, You've
Speaker 1: got people support, and ultimately you're the leader of your country,
Speaker 1: not bond markets.
Speaker 2: Global investors are closely watching, obviously how the Japanese bonds
Speaker 2: and the moves there are going to spill over into
Speaker 2: other markets. I wonder if you can just walk me
Speaker 2: through how global markets are impacted by this.
Speaker 1: Every time jgbs sell off, there's going to be waves
Speaker 1: ripple the facts and then waves to other parts of
Speaker 1: the world. Remember that bond markets dictate borrowing costs for
Speaker 1: governments around the world through to even our own mortgages.
Speaker 1: The impact can be astronomical. Beyond the bond market, borrowing
Speaker 1: costs obviously impact the balance sheets of corporates, bangs, miners, insurers, telecoms,
Speaker 1: AI companies. They need to borrow, and these people will
Speaker 1: be looking at their balances going goodness me, suddenly borrowing
Speaker 1: costs are going up a lot higher. That means I
Speaker 1: need to raise how much I will pay in yield,
Speaker 1: how much I will pay an income as well to
Speaker 1: entice people to buy my debt. So suddenly they have
Speaker 1: to pay a lot more in interest too. So it
Speaker 1: starts like a small seed in some aspects, even though
Speaker 1: it's a seven trillion dollar market. But then it can
Speaker 1: quickly go into a forest fire, very very quickly, and
Speaker 1: happen over night too.
Speaker 2: But just because Japan's vulnerable to forest fire doesn't mean
Speaker 2: it lacks the means to put out a blaze. The
Speaker 2: country may owe a lot at home, but Japanese investors
Speaker 2: like banks, pension funds, and insurers are sitting on a
Speaker 2: massive pile of overseas assets over three point seven trillion
Speaker 2: dollars at the end of twenty twenty four. That includes
Speaker 2: a lot of American government bonds.
Speaker 1: At what point do you, the Japanese some league, wake
Speaker 1: up and say, hold on, our markets are actually great.
Speaker 1: Y'lls have gone up enough now for us to just
Speaker 1: sell our overseas assets and bring the money back home
Speaker 1: and invest in our own assets. Japan is the biggest
Speaker 1: holder of the US treasuries market from a foreign investors perspective,
Speaker 1: with over a trillion, I think it's about one point
Speaker 1: two trillion that they have. Imagine if they sold a
Speaker 1: fraction of that, and I'm not suggesting that they do,
Speaker 1: but if a bit of that money came home, the
Speaker 1: snapback would be incredible. The yen would strengthen like crazy.
Speaker 1: Jgbs would be in demand.
Speaker 2: Now it's been roughly a week since all of this started.
Speaker 2: Where are Japanese bonds yields? This week?
Speaker 1: Things have calmed down a little bit. But if I
Speaker 1: can use the analogy of running a race last week
Speaker 1: was sprint. Everyone was running as fast as they could,
Speaker 1: as hard as they could to either minimize losses or
Speaker 1: make a profit. Yes, things have come down, but they
Speaker 1: are still running, so it's not a job. People are
Speaker 1: still on such tenter hooks as to what could happen next.
Speaker 1: They're ready with firepower if needed, whether to short Japanese
Speaker 1: government bonds or to buy Japanese government bonds. They're listening
Speaker 1: to the authorities. But the mood it's far from calm.
Speaker 1: Everyone is still very much on edge. We still have
Speaker 1: the February eighth election coming up. So if you want
Speaker 1: to ask for a window as to when things can
Speaker 1: sort of pick up again. Look anyway from tomorrow through
Speaker 1: to the election. Take a pic, because all it takes
Speaker 1: is a spock from just a matchstick. The Ambas are
Speaker 1: still there.
Speaker 2: This is The Big Take Asia from Bloomberg News. I'm wanha.
Speaker 2: To get more from The Big Take and unlimited access
Speaker 2: to all of Bloomberg dot Com, subscribe today at Bloomberg
Speaker 2: dot com slash podcast Offer. If you liked the episode,
Speaker 2: make sure to subscribe and review The Big Take Asia
Speaker 2: wherever you listen to podcasts. It really helps people find
Speaker 2: the show. Thanks for listening. To see you next time.