Japan’s Shrinking Bond Holdings Could Be Felt Around the World

The Bank of Japan is allowing its enormous government bond holdings to shrink at a record pace. This is a major change for a country that has spent decades keeping interest rates extremely low and buying bonds to support its economy.

For years, the Bank of Japan was one of the biggest buyers of Japanese government debt. Its buying helped keep bond yields and borrowing costs low. Now, as older bonds mature, the bank is replacing fewer of them. This means other investors must buy more of Japan’s debt, generally at higher interest rates.

This creates a difficult balancing act. Higher interest rates can be viewed as a sign that Japan is finally moving beyond years of weak growth and very low inflation. However, if borrowing costs rise too quickly, they could place pressure on households, businesses and the heavily indebted Japanese Government. That may slow Japan’s recovery rather than support it.

There could also be consequences outside Japan. Japanese investors hold large amounts of money in overseas markets, including US and Australian bonds. If Japanese bonds begin offering better returns, some of that money may be brought home. This could reduce demand for overseas bonds and push borrowing costs higher in other countries.

Australia would not be immune. Our government and banks borrow from international markets, so rising global bond yields can eventually flow through to business loans, fixed mortgage rates and the wider economy.

The situation has similarities to what has happened in the United States. Both the Bank of Japan and the US Federal Reserve bought enormous quantities of bonds when their economies needed support. Both have since tried to reduce those holdings. The key difference is that Japan relied on this strategy for much longer, meaning its return to more normal interest rates could be harder to manage.

Gold and silver remain above their 50-day moving averages, which is still a positive sign. However, their RSI readings are sitting closer to neutral levels and could move strongly in either direction.

Higher interest rates can place some pressure on precious metals, but instability in global bond and currency markets could have the opposite effect. For now, gold and silver appear to be waiting for a clearer signal, and Japan’s next steps may be one of the developments worth watching.

This article is general market commentary only and should not be relied upon as personal financial advice. Consider the information carefully, conduct your own independent assessment and seek professional advice where appropriate before making any investment decision.

Enjoy today’s charts 

Gold daily chart, with 50MDA

Silver daily chart, with 50MDA

US500, with 50MDA

ASX200, with 50MDA