Well just when you think Central Banks can't get any more stupid Japan's central Bank announced it is joining the likes of Switzerland, Sweden and Denmark with negative short run interest rates LINK1 LINK2. The effect was a big surprise as is reflected in the collapse of the 10 year bond yield from 0.21% to 0.09% in one day, that is, a 12 basis point fall.
What central banks don't seem to understand is that low interest rates are distorting the global capital markets, leading to too much debt creation, pushing up artificially asset and property prices and keeping open zombie companies and destroying incentives to save. The zombie companies that are kept open are leading to excess capacity and lower prices that are destroying even the good companies. Also they are mucking around with the basic laws of economics - when I lend to someone I want a positive and not negative return. Let's remember that Japan has a national debt of 235% of GDP, is printing the equivalent of $56 billion per month to buy its own debt through Quantitative Easing and also has an inflation target of 2%. In addition, it has a rapidly aging and declining population. Only someone who is a complete fool would want to lend to such a government at 0.09% per annum for 10 years.
Of course, there are not that many fools around the world. The major holders of Japanese debt are in fact the Japanese themselves as their pension funds, banks and other institutions and their own citizens hold well over 90% of their national debt. This is a ponzi scheme that will eventually end very badly for these debt holders- if yields rise abruptly they will see a collapse in the value of their bond holdings.
What central banks don't seem to understand is that low interest rates are distorting the global capital markets, leading to too much debt creation, pushing up artificially asset and property prices and keeping open zombie companies and destroying incentives to save. The zombie companies that are kept open are leading to excess capacity and lower prices that are destroying even the good companies. Also they are mucking around with the basic laws of economics - when I lend to someone I want a positive and not negative return. Let's remember that Japan has a national debt of 235% of GDP, is printing the equivalent of $56 billion per month to buy its own debt through Quantitative Easing and also has an inflation target of 2%. In addition, it has a rapidly aging and declining population. Only someone who is a complete fool would want to lend to such a government at 0.09% per annum for 10 years.
Of course, there are not that many fools around the world. The major holders of Japanese debt are in fact the Japanese themselves as their pension funds, banks and other institutions and their own citizens hold well over 90% of their national debt. This is a ponzi scheme that will eventually end very badly for these debt holders- if yields rise abruptly they will see a collapse in the value of their bond holdings.
The Yield Curve Japan 29th January 2016
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