Ambrose Evans-Pritchard at the Telegraph:
Kudos to Kyle Bass at Hayman Advisers for warning that the Bank of
Japan would lose control of its ¥70 trillion bond buying blitz. The
spike in the 10-year yield to 1pc on Thursday was certainly shocking to
behold.
His point is that the BoJ faces a “rational investor paradox”. The
authorities are trying to drive up the inflation to 2pc and therefore to
devalue Japanese government bonds (JGBs), so why on earth would you
want to own them?
“If JGB investors begin to believe that Abenomics will be successful,
they will ‘rationally’ sell JGBs to buy foreign bonds or equities,” he
told Bloomberg
He says the scramble to sell has “overwhelmed” buying by the BoJ.
Governor Kuroda will now have double down with a huge increase in the
scale of QE.
The argument is similar to warnings by Nomura’s Richard Koo, Japan’s
most famous economist and an arch-Keynesian. The two men reach the same
conclusion coming from diametrically opposed theoretical starting
points.
As I reported last night, Mr Koo thinks the Abenomics plan of
monetary reflation is madness. “Once inflation concerns start to emerge
the BoJ will be unable to restrain a rise in yields no matter how many
bonds it buys.” This could lead a “loss of faith in the Japanese
government” and the “beginning of the end” for Japan’s economy.
Mr Koo said the BoJ faces a “time inconsistency problem”, a variant of
Mr Bass’s paradox. Markets react more quickly to events than the
economy. “The Japanese authorities are trying to generate inflation
first and then hope for recovery, which means debt service costs will
increase before tax revenues do.”...MUCH MORE
