Global markets are in shock after a massive sell-off of Japanese bonds last week. There is an increasing sentiment in comments that the era of Japanese stability is in the past, writes Bloomberg.
The jump in Japanese bond yields by 0.25 percentage points occurred in a single session, whereas such changes used to take "weeks, sometimes even months" in Japan, said Pramol Dhawan, a fund manager at Pacific Investment, in a comment to Bloomberg.
"The danger is that Japan was a market that never moved, and now we are dealing with a stunning level of volatility. This can be called a Truss moment – the currency is weakening, and yields at the long end of the curve are going out of control," said Hugo Lanchioni of the American investment firm Neuberger Berman.
The rise in Japanese bond yields is linked to the new policies of Prime Minister Sanae Takaichi, who is promoting plans for significant fiscal stimulus and tax cuts, which could lead to further increases in the already high national debt, currently at 230% of GDP.
As a result, investors are pushing bond yields to levels that previously seemed impossible – over 4% for government securities with the longest maturities.
An even more serious long-term challenge for global markets is that high domestic rates may prompt Japanese investors to bring their money back home. About $5 trillion of Japan's capital is invested abroad – not counting yen borrowed by foreign funds to invest in financial assets worldwide.
Such a risk is pushing up interest rates in other countries: the U.S., the U.K., and Germany.
U.S. Treasury Secretary Scott Bessen even called his Japanese counterpart, Satsuki Katayama, to inform her that this sell-off has significantly impacted American markets.
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