Japan Foreshadows Next Global Crisis…”The wild ride in Japan’s bond market is a prelude to what will happen in other developed markets.”
by Asia Confidential
Japan is the only game in town right now and for good reason. First, it was the yen’s +20% move in less than six months and now there’s the extraordinary volatility in Japanese stock and bond markets. What’s behind the recent action? Nobel laureate Paul Krugman points to false alarm over rising bond yields which is actually reflective of increased optimism in a Japanese economic recovery. One can only assume Krugman wrote this with a straight face, all the while ignoring the real reasons for Japan’s dysfunctional bond market: 1) investors bailing due to 10-year government bonds yielding just 0.85% when the central bank is targeting 2% inflation 2) And that snowballing into liquidity concerns as the central bank increasingly crowds out other players in the bond market, leading to increased yield volatility.
These first signs of investors’ losing of faith in Japan’s bond market not only spell trouble for the world’s third largest economy. They’re also likely to prove a prelude to what will later happen in other developed markets, including Europe and America. Namely, the unprecedented economic measures of the developed world will reach their limits when investors no longer view government bond markets as safe havens and yields spike on supply concerns. The jig will then be up and it’ll have huge spill-over effects for the world’s currencies, including the reserve currency, as well as stock markets. Hang onto your seatbelts; it’s going to make for a wild ride.
Paul Krugman can’t be serious