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News Link • Economy - International

As Japan seeks revival, hedge funds bet on horrifying bond bust

• Japan Times

Until a couple of months ago, Takashi Yamada had one of the most genteel jobs in Japan. Now, his days are so harried he doesn’t have time to eat lunch.

Yamada, 45, is a government-bond trader at major brokerage Daiwa Securities Co.

Shock-and-awe monetary policies, announced in April, have sent Japanese government bonds, the nation’s equivalent of U.S. Treasury notes, into a whirl of volatility.

“Our job is about interest rates, and that’s supposed to be like rice in a meal, not steak, something basic but needed,” Yamada said, looking weary and a bit out of breath, after nonstop juggling of bond selling and buying on several monitors at his desk. “No one expected this.”

The sudden frenzy of his job underlines the growing fears about Japan’s surging public debt. Bonds were long stable, which meant the adjustments to bond trades or “positions” Yamada had to do were routine and predictable. Not anymore.

The yield, or interest rate, on benchmark 10-year bonds shot up to 1 percent for the first time in a year late last month, although it later headed back down. In the bond market, yields go up when prices drop, so even tiny moves in those rates can translate into lots of yen made or lost.

The lavish revival policies of Prime Minister Shinzo Abe, including the Bank of Japan’s doubling the money supply in two years, are designed to wrest the nation out of deflation and two decades of economic doldrums.

But at the heart of “Abenomics” is a contradiction: Japan may not be able to afford the inflation that Abe’s grand ambition hopes to ignite.

After years of deficits financed by sales of government bonds, public debt is already twice the size of the economy and interest payments consume a quarter of government spending. It is an unassailable reality that if inflation goes up, so must interest rates and so, therefore, must pressure on the bloated finances of a government atop the world’s third-largest economy.

Although Abenomics has generally lifted Tokyo stocks and lowered the yen, a boon for the giant exporters of Japan Inc., the bond market that keeps Japan’s government afloat is growing ever nervous.



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