Part of the reason people are nervous about Japan is the potential for a disturbance caused by an increase in long-term government bond yields.
The fear is that ultra-aggressive easing will create inflation, leading to an interest rise, creating havoc for banks who own so much government debt.
And in the US, all the concern is about the so-called “Taper” the winddown of QE that may begin this year.
In an email to clients, SocGen’s Kit Juckes writes:
What we are seeing is a minor re-calibration in the cost of money in both the US and Japan, with a feed-through to the rest of the world. In both economies real yields are negative and in both, attempts at reflation are under way. Can Japan survive a 1.5% 10yr yield? Can the US survive a 2.5%yield? Of course they can. That’s not the issue. In Japan’s case the question is what increased yields and increased vol to the p&l of bank portfolios, and in the US the only question is what happens to asset markets pumped up by the hydrogen-like effects of sub-2pct 10yr yields.
In the longer run, we’ll re-calibrate to slightly higher (but still low) yields; we will go on watching mediocre growth, and low/no inflation. Equity folk will doubtless go back to talking about the Great Rotation into stocks. But even if you’re a super-bull, that just means you should seriously consider stocks – and credit – in September. That’s when they run the St Leger, after all.
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