As we approach the end of the year and indeed the end of my blogging year I thought I would look back and what I consider to be the main move has in fact been kind enough to be in play earlier today.
Japan‘s 30-year government bond yield increased by 2 basis points to reach 3.445%, marking a new historical peak amid evolving monetary policy and economic pressures. ( Wind Info)
Maybe a sign of the times that even Wind Info is now looking at it! But this to the Japanese will feel incredibly expensive as they were the nation most committed to ZIRP with bond yields fixed around 0% for so long and indeed NIRP with the official interest-rate at -0.1%.
Switching to the benchmark ten-year it rose 0.02% to 2.05% this morning. It is of course a function of us counting in base ten that we have a big figure change but the move above 2% is significant. After all the Japanese spent so long with effectively no interest-rate. Plus if we now look abroad we see that other bond markets are less attractive to Mrs.Watanabe and her ilk. When you have some yield at home you do not need to chase it internationally so much. Thus we see UK Gilts remaining expensive at over 4.5% for the ten-year and the US at 4.16%. Indeed in a response the US Federal Reserve has stopped QT balance sheet reductions but yet again we see a bond market struggling to rally. I am not saying the Japanese are driving this but one potential buyer has faded and at the margin this matters.
Oh and along the way being short Japanese bonds stopped being called “The Widowmaker”.
Fiscal Policy
This is something that has been in play since the Covid times. Politicians spent massively and then got subsidised by the central banks who drove so many bond yields to record lows and in more than a few cases negative ones. Now it is much more expensive they still act as if it is cheap. Below is the move by Japan’s new government.
Japan’s Cabinet has approved a new economic stimulus package worth about 21.3 trillion yen, or roughly 135 billion dollars.
The package has three pillars: measures to address rising prices, realizing a strong economy, and strengthening the country’s defense and diplomatic capabilities. ( NHK in November)
So we have more spending which is supposed to create economic growth. The catch is that if it worked like that we would not have had The Lost Decade(s) would we? Also as bond yields have risen it keeps getting more difficult. As I often point out this is a slow burner as new bonds are issued but things have been sped up by all the past borrowing and indeed the new fashion for borrowing via shorter maturities. Ironically the latter attempt to avoid a crisis makes it more likely even in Japan which has reserves as well as debt.
In my home country the UK we saw this earlier this month.
Rejoining Erasmus gives new opportunities to many – but is it worth £570m a year? The government has confirmed the UK is rejoining the Erasmus scheme from 2027, allowing students to study abroad in an EU country for a year. (BBC)
Even the BBC has doubts and in itself the government was trying to deflect away from questions about the value of this.
Chief Secretary to the Treasury James Murray says people need to focus on not just the cost of the Erasmus scheme, but also the benefits it brings to the young people in the UK. (BBC)
But for our purposes it is yet more spending when the public finances are troubled. Yet my theme that our political class has not adjusted to new realities was reinforced only yesterday when Children and Families Minister Josh MacAlister talked of “balance the books”and “fiscal credibility” when we just borrow ever more.
Borrowing in the financial year to November 2025 was £132.3 billion; this was £10.0 billion (or 8.2%) more than in the same eight-month period of 2024 and the second-highest April to November borrowing on record (not adjusted for inflation), after that of 2020. ( UK ONS)
Even the U-Turn on Inheritance Tax on farms yesterday whilst in isolation welcome means another little bit is chipped off claimed revenues. That is a toxic link where spending for ever rises but revenues get downgrades.
There’s no escape, I can’t waitI need a hit, baby, give me itYou’re dangerous, I’m loving it ( Britney)
That is before we get to the value of such things as Erasmus looks very expensive.
Central Banks
In theory this should have been a better year for them.After all they are never happier than when providing interest-rate cuts. This time around as well as benefiting their usual favourites “The Precious! The Precious!” and house prices they thought it would boost the bond portfolios these frightfully clever people increased during Covid times. They must be frightfully clever because they keep telling each other and indeed us that.
But the cuts only impacted at the margin and if we look at the US we see that the new range of 3.5% to 3.75% for the official interest-rate is well above the bond yields they bought at. Remember when driving bond yields to all-time lows was so often presented as frightfully clever?
The Fed, the most powerful central bank in the world, has recorded significant losses. It logged a record $114.3 billion operating loss in 2023 and followed that up with a $77.6 billion loss in 2024. So far this year, it had lost $20.8 billion as of the end of September. (Barrons)
Firstly this is not the end of the world as we now it as REM would say. But it is another of those slip-sliding away things that affect confidence and a worsening of the fiscal position as the Federal Reserve used to pay its profits to the US Treasury. Losses are not subtracted though as we see yet another asymmetry or a “deferred asset”. Plus remember there are large capital losses which are completely ignored in a way that would see you or me going to jail.
This problem has also affected the central bank of my home country the Bank of England. In fact it made a move which sets it out as an outlier in the sense that it bought ultra-long bonds. Someone who used to be mentioned on here Professor Danny Blanchflower was a particular fan of this but I have not heard from him in ages. Anyway some of those bonds are now worth a quarter of what the Bank of England paid for them.
One cannot move on without noting the simply awful position of The Tokyo Whale. Imagine you have 560,762,169,743,000 Yen of something that keeps falling in price?! The Japanese Government Bond future has lost 6.5% so far this year.
Comment
Let me end by being more positive. Yesterday’s update on precious metals is good news for those who have invested in them and geographically for places like China and India.Plus there have been rallying stock markets with the US S&P 500 ending at an all-time closing high above 6900 yesterday. Even the UK FTSE 100 has had a storming year although seems at the time of typing to have mislaid the Santa Rally. Bur being near to 9900 is quite a rally especially after the April panic.
Plus I want to wish you all a Merry Christmas and a Happy New Year. I plan to take my usual break and will be back in the New Year. It already has the feeling it will be a busy year for economics and financial markets.
