In a move which would have been unfathomable throughout the entirety of my investing career Japanese yields have pushed firmly through the comparable levels for Chinese government borrowing in the past couple of months.
The consequences of this shift are increasingly evident. Asia’s yield structure has inverted, underscoring a broader trend that has been building for years
Tax cuts promoted across the political spectrum ahead of February’s election are putting further pressure on already stretched public finances. Weak demand at a 20-year debt auction appeared to trigger a sharp sell-off, pushing yields into unfamiliar territory as buyer interest dried up. This is especially significant given that the Japanese public debt burden is comfortably the highest among advanced economies and, amid an election cycle, is increasingly exposed to political risk.
Japan’s central bank, under the leadership of Takaichi, has adopted a distinctly reflationary stance following a deliberate policy pivot by the BOJ. This shift has altered the inflation landscape and driven JGB yields higher, reshaping global capital flows as Japanese investors reconsider overseas exposures and relative value across major bond markets.
At the same time, China’s slower growth trajectory and persistent structural challenges have influenced investor perceptions of Japan’s renewed role as a source of relative yield and stability. Demographic pressures in China have prompted calls that the bellwether emerging market is “turning Japanese” for quite some time and Japan itself appears to be finally “emerging” from decades of stagnation after many false dawns.
The consequences of this shift are increasingly evident. Asia’s yield structure has inverted, underscoring a broader trend that has been building for years: the disinflationary regime that dominated the global economy for four decades is no longer in force.
At Casterbridge we have positioned for this through our exposure to cheap “value” Japanese equities, which have been undervalued on the expectation that the Japanese disinflationary story was never-ending, and gold miners as a hedge against rising geopolitical risk and global inflationary pressures.
Matthew Hull, CFA
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