Ad Hoc Commentary – “JGB prices had reached a permanently high plateau”
Irving Fisher had predicted the stock market had reached “a permanently high plateau” on the eve of the Great Depression. Perhaps, if the celebrity economist is alive today, he might be tempted to conclude that “Japanese Government Bond prices (JGBs) had reached a permanently high plateau”.
In our last note, yours truly noted that fixed income traders would have to blindly buy bonds on every dip. That had worked well in this year-end markets. However, to qualify that, instead of recommending buying with both eyes closed, one should spy on where the eye of the sovereign debt storm is heading. In yours truly mind, it had left Europe a few months ago, and is now heading towards Japan.
JGBs coming off the high plateau is not a ‘bad’ thing for the economy. It will be very painful in the very short term, but that will purge the rottenness out of the system. When capital hoards, we get deflation. When capital is investing, we typically get inflation. JGB coming off the high plateau should thus be seen as good for the Nikkei in the medium term. Simply put, capital that was hoarding will now find its way into productive forces within the nation. Of course, given the size of the JGB market, these capital will find its way into Asia ex-China via FDI. Yours truly believe Japanese money will like Indonesia in particular.
Shinzo Abe reign in 2006 marked the beginning of the ‘one prime minister a year’ syndrome in Japan. Yours truly believe that it is probable that his reign in 2013 will finally mark the end of the malaise. The Nikkei can and should finally bottom in 2013.
The energy policy is of the outmost importance. It is very good that LDP is pro-nuclear. However, to avoid public opinion turning against nuclear, the removal of fuel rods at Fukushima reactor 4 is a must. It is a race against time, and it is encouraging to hear that Japan seems to be winning that race:
So, hang on tight, 2013 should be the year where deflation in Japan ends. The transition into inflation will be sharp and painful, but after all that had been said and done, it will be a stronger Japan and likely worth the short term pain. The Japanese people are known to be long term thinkers and will take one step back to take two steps forward. The time to worry is when the sovereign debt crisis migrates to a land with nuclear weapons, and where the people do not have the capacity to take one step back. That is a worry for another day.
Good luck in the markets.