The U.S. recently advised Japan against weakening its currency to gain a trade advantage. Meanwhile, the country is on many people’s investment radar now that the Bank of Japan has started its monetary easing bazooka. With a plan to double the monetary base over two years in an attempt to end deflation, the yen has been falling, the Nikkei has been rising, and the “widow-maker” has re-surfaced.
What’s the “widow-maker”? Marketwatch explains it well:
Betting that Japanese bonds would fall, sending yields higher, has been known as a widow-maker trade. That’s because it rarely worked. Even with rates low, investors kept flocking to the bonds, sending prices higher and yields lower. The 10-year JGB was yielding 1.89% seven years ago.
On Monday the 10-year Japanese government bond was yielding 0.65% despite the government's decision to increase its debt over to well above 200% of GDP.
Now that the "widow-maker" trade has resurfaced, investors including well-known hedge fund manager Kyle Bass are saying that this time is different: Japan’s bond market is really going to implode under the weight of all this money printing (to paraphrase).
Edward Harrison, founder of Creditwritedowns.com, tells The Daily Ticker that Kyle Bass and other Japanese bears have it all wrong.
“They’re wrong because they don’t understand the monetary system we’re operating in,” Harrison says. He argues the BOJ controls short-term interest rates and longer-term rates are a function of those shorter rates plus a term premium. Harrison says if you’re expecting rates to stay low, there is no reason for yields on government bonds to spike.
The idea that the market will figure out Japan is broke and force a mass exodus from the bond market is a myth, according to Harrison.
“Japan is a fiat currency issuing nation, meaning that they can always make good on their promises,” he says. “The question is what happens when they print money in order to make good on those promises. It’s not that interest rates go up. The release valve is the currency, and that’s what we’ve been seeing. The currency has been depreciating as the BOJ has become more aggressive in its policy.”
Before individual investors go out and try to start shorting the yen or betting on Japanese stocks on their own, Harrison warns it’s a “huge risk to take,” and probably one retail investors should stay away from, for reasons he explains in the accompanying video.
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