China & Japan Deficits, US Treasuries & Tears

Ok. It looks like Japan is not working out and today’s numbers prove it, setting a new record for her worst current account deficit and lowest GDP number since Abe came into office. Deficits would have been taboo in the past with Sony and Toshibas churning away and even the 2011 tsunami did not see it fit to elicit one. But new age Japan has come to accept deficits as the norm, USDJPY barely reacting to the news.

The deficits are the obvious reason why Japan’s holdings of US bonds has not changed much in the past year rising from 1.115 trillion to 1.182 trillion.

japan trade balance usdjpy and holdings of us bonds

China appears to be struggling to hold on these days as well with the Shanghai Composite trading to a 5 year low this week after suffering their first local bond default last week.


Note the glaring anomaly in Japan’s chart. That the USDJPY and trade deficit seem to have decoupled, granted that the trade data has a 2 month lag. It is almost as if we have moved to an fx market enlightenment or… oblivion.

That is because they were waiting for the BoJ.

BOJ kept monetary policy unchanged today

March 11 (Bloomberg) — Japan’s exports have leveled off more or less and a pickup in business investment has become increasingly evident, Bank of Japan says in a statement in Tokyo after holding policy steady today.
• BOJ: Industrial production has been increasing at a somewhat accelerated pace
• BOJ: Will continue easing until 2% inflation is stable
• BOJ: Sees continued moderate recovery even with sales-tax increase

While China’s central bank governor Zhou Sees China’s Deposit Rates Freed Within 2 Years.

And China’s holdings of U.S. Treasuries fell by $47.8 billion in December, the biggest one-month drop in two years, according to the latest figures from the U.S. Treasury. China remains the biggest foreign holder of U.S. Treasuries.

I think they have collectively set a high threshold for any change in their charted course and there is no one left to buy those US treasuries as the Fed tapers 10 bio per month.

At 2.78% per annum for 10Y against the S&P 500’s return of 20% last year and 10Y high yield index giving 5.64%, we really do not have much choice left unless 10Y investment grade bonds at 3.13% (average) look appealing.

Years ago, it struck me as oddly unpatriotic to be putting a country’s national reserves into the currency and bonds of another. Then it occurred to me that, in China’s case and like Japan in the 80’s, it was a Catch 22 situation to keep the currency weak which will bolster demand for their exports. It seemed hardly sustainable that one country’s deficit would be another’s surplus and yet that is how the world has been working.

Now that the deficits are tapering along with the Fed, I suppose it must be time to pay off debts instead of issuing more debt to pay off maturing debt but it will not be happening for some time while Obama is still the president of the United States. And while America is at it, why not everyone else too ? Why should anyone pay off their debts if they can borrow to cover for it ? Or even better if they could get the Fed to buy it off them ?

And here we are, China and Japan, the 2 largest holders of US treasury bonds outside the US, both not in a hurry to buy some more as their growth engines splutter, not that they can sell anything because there is no single buyer out there to match their sizes.

The USD/JPY trading to its own anthem and USD/CNY keeps us guessing away.

It will not do well for us not to heed these warning signs of troubles in bond space and chasing after an asset class that, errrr, keeps growing in supply.

Don’t hate me for going against the consensus but USD/JPY is a sell to target 100.50 and USD/CNY should challenge 6.20 again. As for 10Y US yields ? Tricky situation with Ukraine and the S&P at record highs, but where will the white knight come from ? 3.25% to bring some tears ?