For the first time in more than a decade, the interest rate on Japan’s 10-year government debt reached 1.0%.
Investors are betting that, worried about the extreme weakness of the yen in the foreign exchange markets, the Bank of Japan (BoJ) will gradually normalize its monetary policy, in order to reduce the huge interest rate differential that separates Japanese debt from those elsewhere.
Tokyo’s monetary policy is moving in this direction. It ended negative rates in March (the Japanese prime rate is now 0.0%) and further increases are likely.
In addition, the BoJ has been reducing its sovereign debt buybacks in recent weeks, leaving others an increased role in financing the Japanese state. A trend that will be fraught with consequences: the BoJ borrows more than 40% of the huge stock of Japanese sovereign debt. A reduction in buybacks, combined with the maturity of part of this debt, will result in a reduced role of the authorities in this market and will force the Japanese State to find takers elsewhere for a public debt that reaches 260% of GDP. However, it is unlikely that, with the interest rate levels currently on offer outside the archipelago, investors will agree to finance Japan at current yield levels.
Japanese bond yields are therefore expected to rise gradually. This should not fail to support the yen, which is currently highly undervalued.
Taking advantage of the extremely weak yen, we are currently buying Japanese financial assets (stocks and bonds) as part of all our diversified portfolios.