JGBs Will Rise, But Can You Get Out in Time?

JGB 10 Year

The Bet on JGBs: Buy – WSJ.com.

Japanese Crisis Endgame Has Begun | DARECONOMICS.

A buy recommendation is being touted for Japanese bonds due to the the Bank of Japan’s new leader, Haruhiko Kuroda.

Bank of Japan watchers believe that Kuroda will buy trillions of yen worth of JGBs in order to drive interest rates lower and create inflation expectations in the Japanese economy. These lower rates and some inflation are expected to break the deflationary cycle that Japan has endured for years.  In the meantime, the increased demand for JGBs caused by the BoJ purchases should prompt a rally.

I agree that there will be a rally in yen terms, but I am not so sure that investors will make money in their home currencies.  If Kuroda’s debt monetization plan works, inflation will result weakening the yen.  The appreciation of JGBs may very well be devoured by the depreciation of the currency.  Moreover, if inflation erupts, investors will begin demanding a higher rate to purchase JGBs.  An inflation rate of 2% a year requires an interest rate of at least that much just to break even.

In the short term, there will surely be appreciation in the price of JGBs, but it seems that the BoJ is laying the foundation for a massive price swing through either currency depreciation or higher rates.  People will make money on the Kuroda trade, but only if they get out in time.


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