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Among the facts you note is that Japanese bond are declining.
That is probably good for the Japanese economy. With short rates
low and long rates rising the spread is increasing. The effect
is to make bank lending profitable. As I perceive it that is
exactly what Japan needs to get the Japanese economy going again
(bank lending.)
A rising yen and rising long rates will also have the effect of
having capital repatriated into Japan. That is simultaneously
good for the Japanese market and terrible for the US financial
markets which have been depending on Japanese purchase of US
bonds.
For some good graphics and commentary on Japanese bonds see
HTTP://www.krk-imra.com/current.htm
Stuart
Mervin Yeung wrote:
>
> Hi RTs,
>
> Last week, Japanese GDP came out with a surprise. GDP was up. The
> result was that Nikkei shot up and Jap. Gov't Bond (JGB) went down.
> Foreign money started coming into Japanese equity market.
>
> Jap.Yen went up as a result. As the spread (yield) between JGB and US
> T-Bond narrows, Jap. investors have less incentive to buy US Treasury.
> Also, the rising yen against US Dollar make traders think twice about
> doing the yen carry trades. Hence, US T-Bond went down. US stock
> market, as investors worried about the rising long term interest rates,
> went down, too.
>
> In my opinion, this problem can be solved very easily. The key is Bank
> of Japan. Bank of Japan can print as much yen as it wants. My proposal
> is: first, Bank of Japan should print a whole lot of yen, say 9000
> trillion yen. Then, use these 9000 trillion yen to buy US Dollar.
> After acquring US Dollar, use it to buy US Treasury Bonds and Bills.
>
> The net result of these actions will be:
>
> 1. US Dollar goes up against Jap.Yen. Jap. exporters will be in
> ecstasy. If yen also weakens in the crosses, that will be even better.
> Import prices will rise, and Japan will solve the deflationary pressure
> (Japan biggest problem in the 90's) right away.
>
> 2. US Treasury Bonds and Bills will shoot up as a result of these
> buying. The rising interest rate problem in the US will be solved
> immediately.
>
> 3. Sensing that the interest rates, both long rates and short rates,
> are going down, US investors will interpret it as the best sign that the
> inflation daemon is truly dead, and they will start buying. A new
> (re-new) runaway bull market in US stocks will appear.
>
> 4. A runaway bull market in US equity market will attract huge capital
> inflow from the rest of the world. US Dollar will then shoot up. The
> scale of this USD's rise will overwhelm our imagination. Any remaining
> worries about US Dollar's potential weakness, will be extinguished.
>
> 5. The "wealth effect" from this runaway bull market will stimulate the
> US economy. A strong US economy combined with wild-spending US
> consumers will save the economies in the rest of the world and support
> Asia and Latin America's recovery. The global recession crisis, once so
> threatening, will soon be a distant memory.
>
> However, this plan has some side-effects:
>
> a. US trade deficit will rise. This will not be a problem as long as
> the capital inflow into America occurs. Politically, if Jap. gov't
> promises to keep the T-Bond and T-Bill that they have bought UNTIL THE
> END OF TIME, then US gov't should be happy.
>
> b. A financial bubble and an economic bubble may occur in the US. (I
> don't worry too much about this prospect because we are already in one.
> )
>
> All of the above are my personal opinion. They should not be used for
> trading purpose. I do hope that Bank of Japan will do exactly what I
> suggest.
>
> All the best!
>
> Mervin
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