The Problem With JapanIn this video we discuss the current macro economic problems facing the Bond market and anticipate that regardless of what happens we will see dislocations (volatility) in a number of different markets.
The problems with Japan stems from their monetary policy to implement Yield Curve Control (YCC) where they are committed to keeping their interest rates between +0.25% & -0.25% with the targeted rate as 0%.
As global inflation is hitting consumers hard and all over the world central banks move to increase interest rates & lower economic stimulus introduced during COVID-19, Japan's 10Yr Government Bond (JGB) Yield is at the upper limit of their band (currently trading at 0.22%). As the Bank of Japan (BoJ) now steps into the market and buy as many bonds as required for the market to maintain the desired interest rate it could very easily start to drag other global bond yields such as the US 10Yr Bond lower with it... the exact opposite of what central bankers want right now in order to battle inflation.
Its situations such as this that historically have meant inflation runs out of control and causes catastrophic impacts on the economies of the world, or the flip side to this situation is that Japan is forced to abandon the current band of YCC and accept the inevitable negative effect this would have on both domestic and global Stock markets.
My prediction for how this plays out is that at least for the meantime the global market follows the JGB Yield and starts a correction until this starts to cause real issues for inflation to the extent that central bankers start introducing things such as emergency rate hikes... essentially central bankers may hope they can get away with no increasing rates because they analyse inflation to be "transitory".
In this situation I will be looking at the following trades:
USDJPY Short
Gold Long
Nasdaq Long
Let me know your own thoughts in the comments below & feel free to share this with any friends.
