Transcription
Japanese 30 are back up 14 basis points. That's one of the biggest moves we've seen and it's now back as you just said to a yield that we haven't seen since 1999.
>> And the thought is if the yields rise that money is going to go from the US back to Japan.
>> I think it could be to a real detriment to their economy and a slowdown which would flow back here into the US.
Something incredible is happening. The yield on a 30-year Japanese bond is beginning to catch up to the yield on a 30-year US bond. The closing of this gap may be the most significant global macroeconomic development happening right now. Many believe that the moment these two lines cross will be precisely the trigger for the global debt bubble popping.
You see, Japanese yields are spiking to the highest level in decades, making this a tidal shift in Japan's economic system. Japan is one of the most indebted developed economies with a $10 trillion debt burden, making it an ideal candidate to kickstart a global debt crisis. Because it's not just Japan, China, the UK, France, but of course the United States with now a $38 trillion debt pile. And all of them are interconnected to each other through the ownership of their debts.
Japan, for example, holds over $1 trillion worth of US Treasury bonds, making it by far the largest global holder of US debt. A shock to the Japanese economy would certainly have spillovers to the US. But to really understand what kind of spillovers, we need to take a look at what is actually happening right now in Japan.
By all accounts, the country is in the early stages of a sovereign debt crisis. They have a debt burden that is roughly twice the size of their economy, which means the Japanese government spends the equivalent of 25% of their annual budget just to pay down their debt. Now, for years, there was no real consequence to this. But now investors are waking up to this reality, creating a rush for the exit out of the Japanese debt and currency. Their bond yields are spiking and the Japanese yen is weakening at the same time. So far, all pretty textbook sovereign debt crisis stuff.
But the key component to all of this is why this is happening right now and how it could get much worse. We currently have a short position on the Japanese yen at bravosesearch.com. We sent out the alert to that trade to our clients a couple of weeks ago. We're using a leveraged short ETF on the yen because we think it may be about to collapse. We're currently doing a live stream on this topic where we're highlighting exactly how we'll be trading the Japanese yen on our live trading channel. It's linked down below if you want to watch it.
The reason why all of this is happening right now can be found on this chart right here. It's the three-year average of Japanese inflation. For decades, the Japanese inflation rate averaged around 0%. In fact, often dipping below 0% into deflation, which means consumer prices in Japan were actually going down. And the entire Japanese economic system was built on this. As you can see, it's now completely reversing. Japanese inflation has been averaging around 3% for the last 3 years. And all of the excesses that were built over the last 20 years are now coming up to the surface.
Low inflation allowed the Japanese government to increase its spending substantially at very low interest rates, with little to no consequence. One of the big policies that Japan pushed during this era was something called quantitative easing. To explain it very briefly, the Japanese government was spending a lot of money by issuing bonds, which means borrowing. Normally, regular investors need to buy those bonds. And if there's not enough demand for these bonds, that can make bond yields go up. But instead of risking bond yields going up, the Japanese central bank came in and printed money to buy all of those bonds and keep the bond yields low.
Now, printing money to buy bonds is something that you can do when you're not worried about inflation. But once inflation starts to appear, you need to stop printing money to prevent it from going out of control. And that can cause bond yields to spike. And this is exactly what's happening right now.
This is the Japanese central bank's balance sheet. And it shows us that over the last two decades, the central bank has been accumulating Japanese bonds. But since 2022, as inflation has finally appeared, the Japanese central bank had to stop printing money to buy bonds. And more recently, they've even had to reduce the size of their balance sheet, which means the selling of bonds. Ever since they started to do that, it has prompted Japanese bond yields to sore as the market is realizing that the single biggest buyer of Japanese bonds has just turned into a seller.
So, how does all of this impact the US? With Japanese interest rates going up for the first time in decades, many believe that this is going to push Japanese holders of US debt to dump their US dollars and go into Japanese bonds instead to collect the higher interest. And this is a perfectly rational argument, but it is a little bit simplistic.
This is the size of Japan's government debt against the size of the Japanese economy. It's 2.4 times bigger. This is a very important metric because a country raises tax money from their economy in order to pay the debt. A very large debt relative to the economy can put a country in a very difficult situation.
Now, this is the relative size between the US debt against the size of its economy. It's 1.2 times larger. So, believe it or not, the US is actually in a much more sustainable fiscal situation than Japan. For example, if Japanese interest rates were to rise too much, it could make their debt impossible to pay back and risk a government default. They may even be forced to print money again despite high levels of inflation in order to keep their bond yields low. The US, at least for now, is not in that situation.
And we can see that by simply looking at the Japanese central bank interest rate adjusted for inflation. This is what it looks like. Japanese interest rates are negative when adjusted for inflation. Meaning that if you are a holder of the Japanese yen, you are losing purchasing power every year. Compare that with the US interest rates and we see a big gap between the two. That shows us the US dollar is still a much more attractive currency to hold than the Japanese yen when adjusted for inflation.
Choosing between US debt and Japanese debt is like needing to choose between going on a boat that has a few holes in it or going on another boat that is already half submerged. You would probably just rather stay on the land, which in this case is gold, which explains why it's the best performing asset so far this year.
When we look at the US dollar index, which measures the dollar's performance against a basket of other currency, it has been weakening over the course of the last few years, which has provided tailwinds to assets like gold, silver, but also Bitcoin and the stock market that thrive when the dollar status weakens. But when we add the US dollar's performance against the Japanese yen, we see that it has actually been strengthening against the yen during this period of time. And this is despite Japan seeing its bond yields rise to the highest levels in decades.
This widening gap confirms exactly what we just talked about. If anything, the Japanese debt crisis has allowed the US dollar to strengthen and has probably prevented the US dollar's decline from being much more severe. This is the real spillover that we're seeing from Japan, a stronger dollar.
In fact, we see this as a major opportunity to trade because on one hand, we have many bets against the US dollar through our trades on silver, copper, metal miners, and foreign stocks. But our bet against the Japanese yen in a way hedges our exposure against all of these trades. If the dollar strengthens, our weak dollar bets may take a little bit of a hit, but that will make our trade on the Japanese yen appreciate significantly. If the dollar continues to weaken, as we expect, on the other hand, our weak dollar bets will thrive. And we still think our bet against the Japanese yen can do well.
We explain all of this on our website at braavosresearch.com and send you the live alerts every single time we make a trading decision. We trade stocks, commodities, crypto, and these have allowed us to make some incredible gains over the course of the last couple of years. So, if you're interested, join our membership. You won't regret it. Thank you for watching.