We spoke recently about Japan and their bomb… urgh, I mean bond market — so easy to get the two confused.
For a brief recap: basically, the pointy shoes at the BOJ have promised to keep the yield on the government’s bonds at 0%, with a tolerance level of 25bps. With debt to GDP that makes blood shoot from my eyes this is now proving a wee bit difficult. Those bond yields have blown out despite “UNLIMITED BUYING.” Central planners are stumped and puzzled.
Talking of unlimited buying… See that needle at the end of the chart?
That there is some serious firepower. And yet…
So much of what is taking place is unprecedented. It is an often overused word but not in this instance. The problem isn’t purely in the bond market, though. Looking at the entirety of the Japanese economy is worthwhile.
The Japanese economy continues to crater. Month-to-month industrial production for May was -7.2% and year-on-year it was -2.8%. Yikes!
Tied into all of this is the following…
We all know that Japan’s Achilles’ heel has always been their lack of energy independence. Being an island nation this means they need security of transit. It is why Japan boasts the fourth largest navy in the world.
Now, with the cost of energy spiralling higher and no ability to control this crucial part of their economy all sorts of cracks are forming, including the BOJ’s inability to continue to keep JGB bond yields pegged at 0%.
You may think that these two things — monetary policy and energy policy — are separate issues. They are not. Everything is connected. Think it through. If bonds blow out, the yen weakens, and when the yen weakens, energy becomes that much more expensive and you all by now know that energy affects every good produced, transported, and consumed. This is really not something that Japan is positioned for.
But it isn’t the bond yields blowing out and weakening of the yen that caused the problem. The catalyst was rising energy prices, which against the JPY amounted to a weakening of the yen in purchasing power terms. The fact that energy forms the very foundation to all goods produced seems to still be lost on so many and yet it is critical. Energy is already and will continue to be the wrecking ball that takes down this global debt house of cards… and all the ancillary bits and bobs, many of which we’ve probably not even considered.
So where does this leave Japan and what to do?
With most of the country’s workhorse nuclear reactors offline, “we will work steadily to speed up reviews” needed to restart them, Kishida told reporters following the Group of Seven summit in Germany.
I think the heat wave is just a smoke screen. A useful narrative to cover their inept handling of both their monetary problems as well as their energy problems. Heat wave or not, Japan desperately needs to secure their energy security. Remember, China is not a friendly neighbour, and we are all increasingly aware that we live in… ahem, interesting times.
Also, Japan relies on the US as an ally for regional security. That’s an ally which looks rather shaky right now. If the pointy shoes in Tokyo aren’t thinking about all of this, I’d be rather shocked. So the move to use nuclear power makes a lot of sense for Japan on many fronts. I expect this is the first of many such moves on the part of Japan to return to nuclear power.
We’ve had a decent bull market sell off in uranium equities. That is to be expected. The uranium market is, however, more volatile than a triggered leftie at a gun rights rally, and so brace yourself for this. It is just what it is.
If you were not positioned in this sector when we first added it to our portfolio over three years ago, then this may be a decent opportunity to correct that.