Japan has attracted a bit of attention after the LDP's leadership election -- yen down, stocks up, long-term JGB yields up Two observations -- one is that the increase in JGB yields over the last 12ms hasn't had much of any impact on US yields. At least not for the 10y 1/
The yen also hasn't recently moved with at least the 10y rate differential (and there is an argument that other rates matter more of course ... but the same would be true at most tenors) 2/
The corollary is that higher Japanese rates (long-term nominal rates that is, real rates are a bit different) haven't pulled Japanese funds back home. This is a lagged chart -- but it shows how stable Japanese (private) fixed income portfolios have been after 22 ... 3/
Lots of theories as to why -- one is that a lot of big institutional investors have been locked into their existing USD, EUR and JPY holdings by mark to market losses that they don't want to realize ... 4/
And there are more Japanese specific arguments (which I tend to discount but perhaps wrongly) that Japan is now entering a new era of higher inflation and higher rates -- and thus Japanese institutions aren't yet comfortable with current JGB yields. To be continued 5/5
@Brad_Setser Additional argument : their population is so old that pensions and insurers no longer need 30-40y paper for liability immunization.
@DannyDayan5 yes, that is an argument -- and presumably why Japan is going to scale back issuance of the ultra longs
@Brad_Setser Do you mind expanding on a bit on what something like this might look like ig?
@Brad_Setser I think most FX traders focus shorter than 10, more in the money market regime.
@Brad_Setser Fed started buying bonds again in March... that's why. It's YCC...
@Brad_Setser Another hypothesis is that Japanese financial institutions are now anticipating depreciation of JPY in near future.