JAPAN: The Securities Market Broke (A fall of 11%) – BoJ Will Be Forced to Print

[Igor Pereira]

Traders, history doesn't repeat itself, but it rhymes in a terrifying way. What we're seeing in Japan today is an almost exact copy of United Kingdom collapse in September 2022.

By Igor Pereira Financial Market Analyst

Prime Minister Sanae Takaichi has just committed the capital sin of debt markets: proposing tax cuts not financed in a country that already has the largest debt in the world. The market responded instantly.

The price of 30-year securities (JGBs) collapsed almost 11% since October, with a vertical acceleration in the last days.

Below, the analysis of why Japan has just lost control of its interest curve.

PM Takaichi proposed to suspend the food sales tax (consumption) to win the election.

• The Cost: It's estimated to cost ¥5 trillion ($31.6 billion) a year to public coffers.

• The Problem: She didn't explain where the money's coming from. The market immediately assumed that it will be financed by plus debt.

• The British Parallel: Like Liz Truss and Kwasi Kwarteng in 2022, Takaichi tried to stimulate the economy with money he doesn't have. The securities market ("Bond Vigilantes") punished fiscal arrogance with a massive sale.

When the price of the title drops 11%, the yield (yield) fires.

• The Empina Curve: The income of the 40-year title has reached 4.2 % and the 30-year-old played 3.88%. These are levels that make Japanese debt mathematically priceless without massive inflation.

• The Rejection: The 20-year-old securities auction failed (bid-to-cover low), proving that there is no private demand to finance this fiscal recklessness.

This is where the crisis becomes systemic.

• The Risk: Pension funds and Japanese banks hold trillions of these bonds. A 11% drop in price opens gigantic holes in your balance sheets (as well as LDI funds in the UK).

• Forced Action: To prevent the Japanese financial system from imploding, the Bank of Japan (BoJ) will have to intervene and buy everything. They will have to restart the Yield Curve Control (YCC) and print infinite yen to absorb this toxic debt.

The normal correlation (High Interest = Strong Currency) broke. We are in a scenario of Tax Dominance. When the country's solvency is questioned, both the Securities and the Coin fall together.

My Vision: JPY is in extreme danger.

1. Don't buy the bonds down: The market is re-precing Japan's sovereign risk. Well, bottom's not up yet.

2. Volatility in JPY: If BoJ announces an "emergency purchase" to save the bonds (as the Bank of England did), the yen will be sacrificed. USD/JPY can fire again, not by virtue of the Dollar, but by weakness of Japan.

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Game Turned: The BoJ Breakpoint

There is a level of income in the 10-year bond which, if exceeded, automatically triggers settlement clauses in derivatives of large Japanese banks. BoJ will defend that level with his life.

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