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May 25 15 tweets 6 min read Read on X
What is happening in Japan?

In 45 days, Japan's 30Y Government Bond Yield rose a MASSIVE +100 basis points, to a record 3.20%.

Over $500 BILLION worth of "safe" 40Y Japanese Government Bonds have lost 20%+ in 6 weeks.

Is Japan's bond market imploding?

(a thread) Image
What's happening in Japan is not "normal."

Japan's 40Y government bond that was yielding ~1.3% two years ago is now yielding 3.5%.

As yields continue to surge, inflation has begun to rebound and Japan's economy is decline.

It appears Japan is entering a recession. Image
The surge all began when the Bank of Japan (BOJ) made a major policy shift.

After years after BUYING bonds, the BOJ stopped doing so.

This resulted in much more bond supply hitting the market, which drove yields higher.

And, the BOJ has a colossal balance sheet still. Image
In fact, the Bank of Japan now owns a whopping 52% of all domestic government bonds.

By comparison, life insurers, banks, and pension funds hold 13.4%, 9.8%, and 8.9%, respectively.

The BOJ still holds a massive $4.1 trillion of government bonds on its balance sheet. Image
Furthermore, the Japanese government now holds $7.8 trillion of debt.

This makes the Japanese government the third most indebted government in the world, behind the US and China.

As we are seeing in the US, rapidly rising government debt has left bond investors worried.
Japan's Debt-to-GDP ratio recently exceeded 260% for the first time in history.

Their Debt-to-GDP ratio is roughly DOUBLE the United States.

It is also one of the top 5 in the world.

Last week, Japan's Prime Minister warned their financial situation is "worse than Greece." Image
As we saw in the US last week, Japan's bond auctions are now spurring WEAKER demand.

When there is less demand, bond prices fall and yields rise.

As the Japanese economy slows and uncertainty rises, yields are accelerating.

This will be highly damaging to Japan's economy. Image
We are already starting to see the effects of both tariffs and rising yields.

In Q1 2025, Japan's Real GDP CONTRACTED by -0.7%, much more than expectations of -0.3%.

This marked the first decline in Japan's GDP since Q1 2024.

We expect to see more weakness ahead. Image
Meanwhile, Japan's CPI inflation is hit 3.6% in April, rising +0.4% month-over-month.

CPI ex fresh food jumped 0.7% MoM, the largest monthly increase since October 2023.

On an annual rate, it accelerated from 3.2% to 3.5%, the fastest since January 2023.

Stagflation is here. Image
We have seen similar trends in the US, with the 10Y Note Yield surging above 4.60% last week.

Bond auction demand has weakened, rate cuts are being delayed, and deficit spending is rising.

Under the new tax bill, the US deficit is set to grow by +$3.8 TRILLION in 10 years. Image
The US is now seeing Debt-to-GDP levels that are ~10% ABOVE WW2 levels.

Such a rapid surge in Debt-to-GDP led to the Moody's downgrade of the US credit rating on May 17th.

However, this is still only HALF of what Japan is seeing.

Japan needs a major restructuring. Image
Finally, to make things even worse, real wages are declining SHARPLY in Japan.

Real wages fell -2.1% year-over-year last month, marking the largest drop in 2+ years.

So, as inflation rebounds, real wages are declining.

The BOJ can NOT hike rates into this environment. Image
The main problem with Japan's economy is the variety of conflicting drivers.

While inflation rises, real wages are falling, and while the government takes on more debt, demand is falling.

If yields continue to surge, the BOJ will need to intervene, but it won't be pretty.
Unusual times lead to unusual swings in the market, and uncertainty is still very elevated.

Our subscribers are capitalizing on these swings.

Want to see how we are trading it?

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The Yen Carry Trade collapse in August 2024 was a glimpse of how intertwined Japan is with global markets.

On August 5th, the Japanese stock market experienced its worst loss since 1987.

Keep watching Japan.

Follow us @KobeissiLetter for real time analysis as this develops. Image

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More from @KobeissiLetter

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Why did this happen? Let us explain.

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To put this into perspective:

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Is this dip a BUYING opportunity? Let us explain.

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What does this mean? Let us explain.

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For decades, Moore’s Law was the gold standard measure of technological progress.

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What's happening? Let us explain.

(a thread) Image
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