Massive BOJ-Buying Silences JGB Market

On Monday, the newest 10-year Japanese government bond — the yield on which is used as a benchmark for bank loans and a barometer of trust in government finances — didn’t trade even once.

Traders say it is another sign of how the Bank of Japan’s massive bond buying program has silenced the market.

If the 10-year JGB goes a full 24 hours without being traded, it will be the first time since Dec. 26, 2000, according to the Japan Bond Trading Co., which publishes rates.
That seems likely, since most investors close their books at 3 p.m. Tokyo time.

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Link Massive BOJ-Buying Silences JGB Market !! 

Japanese government bonds will default

CNBC’s Rick Santelli and Tres Knippa, Kenai Capital Management owner, breaks down Japanese government bonds and provides insight on investing in emerging markets.
Tue 04 Feb 14

TresKnippa
“it is my opinion that long term there is a significant likelihood Japan will experience a sovereign debt crisis. As a result it is my belief there is an opportunity to trade and be net short the Japanese government bond market.”     Tres Knippa
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Japanese national debt surged over ¥1 Quadrillion Yen, or 1000 Trillion Yen in early August

Japan Public Debt in Trillion, 1996 To July 2013 – (Bloomberg)

¥1 quadrillion Yen !

Think about that word quadrillion for a moment or two, because understanding it will help you understand the scale of the debt crisis in Japan and much of the western world.

Our parents thought a million was a very big number. Then a billion became the big number. Recently, a trillion entered the lexicon as a big number.

A paltry million is the numeral one followed by six zeros. A billion? Nine zeros. A trillion is a thousand times bigger again at 12 zeros. But the mighty quadrillion is a one with fifteen zeros after it or 1,000,000,000,000,000 (as the eye strains).

Compared with Japan, the United States national debt is a mere $17 trillion or so. But if you convert that number into yen, it comes to about 1.6 quadrillion.

We laugh at children when they talk about bazillions and gazillions but a quadrillion is no laughing matter.  Measuring any currency in quadrillions brings to mind the many hyperinflations seen in the 20th and 21st centuries. For example,  the powerful and very wealthy Germany in the early 1920s and wealthy Zimbabwe, the breadbasket of Africa in 2008.

Japan’s soaring national debt is already more than twice the size of its economy.

Even at current all time record low interest rates, Japan spends nearly 50% of its tax revenues on interest payments. The Japanese 10 year government bond is trading at just 0.70% today. At borrowing costs of 2% to 3% per annum, two to three times current rates, Japan’s interest payments will be an unsustainable proportion of tax receipts.

Higher interest rates will also trigger problems for Japanese banks, Japanese pension funds and insurance companies, which also have large holdings of Japanese government bonds (JGB’s)

This is leading to and will lead to a surge in demand for gold as a hedge and safe haven.

From tiny levels given the level of savings in Japan, investment in gold bars and coins more than doubled to 4.5 tons last quarter from 2.1 tons a year earlier, the World Gold Council data shows.


Gold in Japanese Yen – 2008 to Today (Bloomberg)

Gold demand increased in recent months as a slump in the international market made bullion more affordable to investors. The Japanese government’s economic policy boosts expectations for inflation and the Japanese yen fell on international markets.

The volume of gold trading on the bourse, known as Tocom, expanded 27%  to 9.5 million contracts in the eight months through August 31st from a year earlier. Abe’s economic policy weakened the yen and boosted yen-denominated gold prices.

Gold futures on Tocom climbed to a record 5,081 yen a gram ($1,592 an ounce) on February 7th and closed at 4,165 yen a gram or 128,802 per ounce today. Link: GoldCore