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Market Minute: Japanese bond holdings and global yields

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The chance that Japan’s long-dominant Liberal Democratic Party may lose its majority in the upper house of parliament has created a risk of higher bond yields not only in Japan but also across the international economy.

At a time of scarce capital to finance private investment, this possibility risks the return of government spending crowding out private borrowing not only in Japan but also in the United States and Europe.

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The $8 trillion Japanese bond market has been an anchor of lower global rates over the past few decades as the Bank of Japan’s asset purchase program to fight deflation kept rates low.

But now, with government spending rising around the world, global investors have been pushing rates higher. The Japanese 10-year bond, or the Japanese government bond, stands at 1.57%, well above the 25-year average of 0.85% and the 1.99% posted in May 2006.

In addition, as the Bank of Japan continues its quantitative tightening program, the question of who purchases JGB’s amid a possible increase in fiscal outlays is part of a larger narrative of expansionary fiscal policy across the global economy.

Japan’s ratio of interest payments to revenue will increase to 12.2% from 9.9% this financial year, according to Bloomberg data. This implies that additional taxes will be needed to avoid a spike in interest rates.

Given the importance of the Japanese bond market, such a rise would send rates higher in the European Union and the U.S.

Note the large holdings of life insurers, banks and pension funds. Those are a preview of coming attractions around the global economy should issuance of government debt send prices lower, yields higher and investors for the exits as government spending crowds out private sector needs

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About Joseph Brusuelas

@JoeBrusuelas

Joe Brusuelas, “chief economist to the middle market,” is the preeminent voice championing issues and policies facing midsize companies in the United States and around the world. An award-winning economist, Brusuelas has more than 20 years’ experience analyzing U.S. monetary policy, labor markets, fiscal policy, international finance, economic indicators and the condition of the U.S. consumer.

A member of the Wall Street Journal’s forecasting panel and the UCLA Anderson School of Management's Board of Directors, Brusuelas regularly briefs members of Congress and other senior officials regarding the impacts of federal policy on the middle market and the factors by which middle market executives make business decisions. He also frequently offers his insights on the U.S., Canadian and global economies in the financial media. In 2020, he was named one of the 100 most influential economists by Richtopia. In December 2023, Brusuelas and the economics team were recognized on Bloomberg's list of Best Bond Forecasters after correctly predicting where the benchmark Treasury would end the year.

Before joining RSM in 2014, Brusuelas spent four years as a senior economist at Bloomberg L.P. and the Bloomberg Briefs newsletter group, where he co-founded the award-winning Bloomberg Economic Brief. Earlier in his career, he was a director at Moody's Analytics covering the U.S. and global economies for the Dismal Scientist website. He also served as chief economist at Merk Investments L.L.C. and chief U.S. economist at IDEAglobal.

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