Japan is trapped in a difficult situation: high levels of debt/gdp (260%), global inflation, and a #yieldcurve control policy, whereby the #boj prints #yen to buy 10 year Japanese govt bonds (JGBs) to keep their yield within a range, currently +-0.25%. As global investors are dumping bonds with very negative real yields, the #boj needs to print more money to defend the 10 year yield range. As a consequence, the #yen has gone from 115 vs #usd at the end of 2021 to 135 today. If they let the JGBs yield rise like the other government bonds, interest costs will skyrocket and become a bigger budgetary problem than they already are. If they don’t, they’re going to need to print more money, devaluing the yen aggressively, particularly in an environment where other central banks are hawkish. Here’s THE catch: #Japan is the biggest foreign owner of US treasury debt ($1.3Tn). What if they sell #ustreasury bonds to buy yen and defend their currency?
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Chart Source: Bianco research
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