Japanese prime minister Shinzo Abe had a pretty bad day on Monday: Standard & Poor’s and Moody’s, two of the world’s most important credit rating agencies, rounded on him.
Moody’s downgraded Japan because it doesn’t believe the country’s public finances are sustainable, and S&P said they don’t expect to get a proper deficit reduction plan from the government.
Trading on Tuesday saw a rise in Japanese 10-year bond yields. Bond yields are used as a common measure of how much it costs a government to service its debt, and how sustainable its public finances are. A spike is what you’d expect if investors were losing faith in the government.
Even though yields rose by 1.17%, that barely registered for one simple reason: Japanese yields are already the world’s lowest. Yesterday’s jump raised yields from 0.42% to 0.43%. It was a 1.17% increase on paper, but a 1.17% increase on such a tiny figure is a similarly tiny increase. Here’s how yields look over the last five years:
In fact, Japan’s 5-year bond yields just touched a record low on Tuesday, according to Bloomberg.
Investors seem to be betting on the fact that, whatever the sustainability of Japan’s public finances, for the foreseeable future the Bank of Japan will be buying government bonds (QE) like it’s going out of fashion. When they do that, it drives up prices and drives down yields, and there’s no end in sight for the country’s massive QE programme.
Chris Scicluna at Daiwa Capital Markets took a similar view in a note this morning:
We considered yesterday’s Moody’s downgrade of Japan’s sovereign rating to be incoherent, admonishing Abe for his proposal to postpone next year’s consumption tax hike while grudgingly acknowledging that his strategy “could have merits”. And today, Japan’s markets responded to the announcement with a collective shrug from domestic investors
Bank of Japan 1 – Credit ratings agencies 0.