The beginning of the end of the Japanese bond market

The following is an excellent presentation by Christine Hughes of Otterwood Capital Management on the beginning of the end of the Japanese bond market and how it has negatively impacted gold in the short term.

On April 4, 2013 the Bank of Japan announced their “2-2-2-2″ policy in which they will attempt to create 2% inflation in two years by doubling the monetary base along with doubling their JGB holdings. In the short term, Hughes says, the absurdly low interest rates, coupled with a formal commitment from the BOJ to depreciate the currency, have lit a fire under the Yen carry trade. This has created an insatiable demand for yield around the globe as rates on European periphery debt has been pushed down. The flip-side is that non yielding instruments such as gold have been punished in the short term. The recent precipitous drop in the price of gold occurred almost immediately after the BOJ announcement.


In the longer term, the real question is, what happens when a weak Yen is no longer viewed as a positive? Although 90% of the Japanese debt is held within the country, it will not remain a domestic issue. According to Hughes, when the bonds are perceived to be at risk, the money will flee. Currently Japan has a debt to GDP of 245% and the interest rate clock is ticking. Tax revenues have fallen for the last twenty years and the total amount of interest due is accelerating even in the face of falling rates. In the long term Hughes likes gold as nothing has changed regarding the ultimate fate of Japan, they have only brought forward their day of reckoning.

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