Yields on 10-year Japanese bonds (JGBs) have doubled in a month and spiked dramatically to 1pc on Thursday, triggering a 7.3pc crash in the Nikkei stock index. It was the biggest one-day fall since the tsunami two years ago, comparable with wild moves seen at the height of the Asian crisis in 1998.
Richard Koo from Nomura, an expert on Japan’s Lost Decade, said the sell-off in recent days has shown that the BoJ may not be able to hold down yields “no matter how many bonds it buys”. This could lead to a “loss of faith in the Japanese government” and the “beginning of the end” for its economy, if handled badly.
The drama in Tokyo came amid fresh signs that China is struggling to manage the hangover from its four-year lending boom, which has pushed credit to 200pc of GDP and spawned a shadow banking system.
Morgan Stanley has stopped relying on Chinese growth data to assess growth, using proxies such as Korean exports and Taiwan bonds.
“China is slowing hard. We are concerned that leverage is higher than reported, and banks have a huge maturity mismatch,” said Hans Redeker, the bank’s currency chief.
“At some point, the JGB market is going to crash. The crucial question is whether they can prevent the banking system from being hurt? It will be tricky, and I am not sure the BoJ has thought this through,” said Prof Werner.
Mr Koo said the BoJ has undermined the “market structure” that has kept Japan’s bond market stable for 20 years, and invited an attack by short sellers.
Full article: Veteran fears ‘beginning of the end’ for Japan as bond market buckles (The Telegraph)