Japanese Bonds

I switched from journalism to finance in September 1998. My first job was at a bank on the “currency desk,” meaning we traded global currencies and interest rates for corporate clients. My boss believed the dollar would rise against the Japanese yen.

About two weeks before I joined, Russia defaulted on its debt. Investors had borrowed in yen, which didn’t cost much, and invested in Russian bonds, which had high yields. When Russia defaulted these investors got crushed and “unwound” those trades, forcing them to buy a lot of yen. The yen rose 20% in a short spurt. It was an early lesson in how violent and interconnected swings in financial markets can be.

Flash forward a quarter century and one of the things I still enjoy about macro investing is that it forces us to take a broad scan of the world. It is indeed all interconnected. On the one hand, each region’s culture, history, and rhythms are unique. On the other hand, over the last 200 years, many countries utilize more or less the same techniques to raise capital, creating a uniform set of measures—bond yields, stock prices, currency values, GDP, and inflation. These prices and data are a window to understand.

Japan is fascinating because it is so different than the US. Beyond a unique, ancient island culture that is particularly impenetrable to outsiders, it is also true that:

• While the US stock market has been in a protracted bull market, Japan has been in a 30-year bear market, despite rallying recently.

• While US interest rates are the highest in years, Japanese rates are still below 1%.

• While the dollar is probably in a bubble, the yen is exceptionally weak.

These movements all stem from the same root cause—the Bank of Japan, which pursued one policy (aggressive asset purchases) and now appears to be shifting. That shift caught my attention. Today, I want to dig into the Japanese bond market.

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