With yields going up in Japan, the risk is that Japanese investors will now begin to sell US fixed income and start buying higher-yielding Japanese fixed income.
This is a big deal for global fixed income markets because Japanese investors are the biggest foreign holder of US Treasuries, and they also own significant amounts of US credit.
Our updated BoJ YCC exit chart book is available here, a few key stats:
Japan is the largest holder of US Treasuries in the world, see the first chart below.
The BoJ owns more than 50% of all JGBs outstanding, see the second chart.
BoJ JGB buying has been a dominant force in markets for the past decade, see the third chart.
Because of the significant yield differences in the front end of the yield curve between the US and Japan, the hedging costs for Japanese investors buying US Treasuries are very high at the moment, see the fourth chart.
Also, this BoJ illustration of their policy change shows how they will now do “YCC with greater flexibility.”
All other central banks in the world, including the Fed, ECB, BoE BoC, and RBA, have aggressively raised short-term interest rates to get inflation under control. The BoJ has not raised short-term interest rates, and abandoning YCC is the BoJ’s response to high inflation. The BoJ YCC policy started in 2016.
Source: Bloomberg, Apollo Chief EconomistSource: BoJ, Bloomberg, Apollo Chief EconomistSource: Bloomberg, Apollo Chief EconomistSource: Bloomberg, Apollo Chief Economist
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