Mrs. Watanabe Prepares To Blow The JGB Bubble: Household Holdings Of Japanese Bonds Slide To Lowest In 7 Years

Two days ago we posted a very damning analysis of why Japan is finally facing the dilemma of either a major Yen devaluation, or, far worse, a long-overdue pop in the Japanese Government Bond (JGB) market. As expected, the conventional wisdom was that there is no danger of a JGB collapse as local households just can't get enough of JGBs following 30 years of straight deflation. As even more expected, conventional wisdom always ends up wrong, and this may be the case now. Bloomberg reports that "Finance Minister Jun Azumi’s efforts to get Japan’s households to increase investment in the nation’s debt are failing as holdings of government bonds fall to a seven-year low." Combing through the Japanese quarterly flow of funds report shows something very disturbing - the last bastion of JGB ownership, Japan's households, have started to shift out of bonds, which are now yielding 0.27% for the retail 5 Year bond, and about 1.00% for the 10 year, and are now putting their money straight into mattresses. "Japanese households owned 3.09 percent of domestic bonds in the final quarter of 2011, a decrease from 3.2 percent in the third quarter and the lowest since 2005, Bank of Japan data released March 23 show." And the worst news for any domestically funded ponzi regime: "Mrs. Watanabe” as many are housewives, have instead increased foreign-currency deposits and cash, according to the BOJ data.  "It’s a case of retail JGBs not having enough yield,” said Naomi Fink, head of Japan strategy at Jefferies Japan Ltd."Households are accumulating cash and using financial investments to diversify into higher yields and JGBs don’t really provide this." ..."Individual investors are holding cash rather than bonds and other financial assets because they are wary of making risky investments, said Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset Management Co. in Tokyo." Needless to say, when even Japanese households have given up, it's game over... for bubbles in both bonds and in "conventional wisdom."

Bloomberg has more:

Households “don’t see any reason to continue buying bonds,” said Hiromichi Shirakawa, chief Japan economist at Credit Suisse AG and a former Bank of Japan official. “Deposits are much more liquid than JGBs. So if they do have some incentive to spend that money, they tend to prefer more liquid financial assets.”


Japan’s Finance Ministry has set up a Twitter account to sell government bonds to households. Azumi is also sending thank-you notes to buyers of debt to fund the nation’s rebuilding after last year’s record earthquake, and offering gold coins to those who invest more than 10 million yen.


The moves haven’t spurred individual investors to take on more of the bonds, with banks and foreigners increasing their debt holdings instead.


Japanese bonds owned by overseas investors climbed to 8.5 percent of the total at the end of December, the highest since 2008, while financial institutions held 65 percent, an increase of one percentage point from the previous quarter, the BOJ data show.

Of course, even Japan is now worried about being seen as a ponzi:

Bank of Japan Governor Masaaki Shirakawa told the parliament yesterday that government bond yields may rise if the BOJ is perceived as financing the government. The central bank unexpectedly increased its planned bond purchases by 10 trillion yen and set a 1 percent inflation goal on Feb. 14.


The yield on Japan’s benchmark 10-year government bond climbed to 1.06 percent on March 15, the highest since Dec. 5.
It traded at 1.01 percent yesterday in Tokyo, a 7 1/2 basis point increase from the more than one-year low of 0.935 percent in January.


Ten-year notes yielded 124 basis points, or 1.24 percentage points, less than similar maturity U.S. Treasuries yesterday, compared with 219 basis points a year earlier.


The yen has depreciated 9 percent in the past three months, the worst performer among the 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes. The Japanese currency was little changed against the dollar at 82.85 yesterday in Tokyo.

There is a simple solution:

Vice Finance Minister Fumihiko Igarashi said yesterday it would be better if more overseas investors held Japan’s government bonds to ease the risk of “one-sided” selling.

And foreigners will be delighted to buy JGBs.... just hike interest rates from a meaningless 1% to at least 2% to match the US 10 year, and make JGB's attractive. Oh wait, there is a problem with that. As Andy Xie pointed out: "If the bond yield rises to 2 percent, the interest expense would surpass the total expected tax revenue of 42.3 trillion yen."


In the meantime, the risk of "one sided selling" is higher than it has ever been in the past 3 decades.