Sky's Ian King explains the extraordinary bond market activity to have hit Japan in recent weeks, following on from the similar pressure on UK yields in the wake of the Truss government's ill-feted mini-budget.
The UK government got a taste, last year, of what happens when you rub up the bond markets the wrong way.
Nor, unlike the likes of the Fed and the Bank of England, has the BoJ sought to unwind the emergency asset purchases - Quantitative Easing in the jargon - made during the last decade to stimulate economic activity.However, once it owned more than half the bonds issued by the Japanese government, the BoJ realised it was approaching the limits of what QE could do so it embarked on something called 'yield curve control'.
On 20 December, with investors winding down ahead of Christmas, the bank raised the cap on 10-year Japanese government bonds from 0.25% to 0.5%. The rationale was that the BoJ could be seen as moving back towards what might be called a normal interest rate policy but without actually raising interest rates.Traders aggressively sold 10-year Japanese government bonds and, on Friday, the yield jumped above the cap to 0.545% at one point.
For much of the last 20 years or more, shorting Japanese government bonds has been described by market professionals as the 'widow maker' trade, since most speculators who tried it lost their shirts. The experience of last Friday suggests there may, finally, be money to be made from doing so.It is, though, much more important than that.
The Truss administration's policy of letting borrowing rip to pay for unfunded tax cuts was, up to a point, informed by what had happened in Japan.Government made 'some mistakes' with the mini-budget
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