What does the current storm in the Japanese bond market indicate?

Recently, the storm in the Japanese bond market has caught the attention of global financial markets. The outbreak of this storm is not an isolated event, but a concentrated outbreak of deep-seated problems accumulated in the Japanese economy for a long time, which contains many warning signals worthy of in-depth analysis and reflection.

On the surface, the direct trigger for the storm in the Japanese bond market is the adjustment of the Bank of Japan's monetary policy. For a long time, in order to stimulate economic growth and fight against deflation, the Bank of Japan has implemented ultra loose monetary policy, purchased treasury bond on a large scale, lowered long-term interest rates, and kept the yield of 10-year treasury bond at a very low level for a long time. Although this measure has maintained the economic stability to a certain extent, it has also led to a high dependence of the treasury bond market on the central bank, and the market's own pricing mechanism and supply and demand adjustment function have been seriously distorted. In 2024, when the Bank of Japan began to gradually reduce the scale of quantitative easing and reduce the purchase of treasury bond, the market supply and demand will be unbalanced instantly. The treasury bond originally absorbed by the central bank suddenly needs to be digested by other investors. However, treasury bond, which has been in a low yield environment for a long time, has limited appeal to investors. As a result, there is a shortage of buyers and the selling has intensified. The price of treasury bond has plummeted and the yield has soared, triggering a violent turbulence in the bond market.

Through in-depth exploration, this storm reveals the dilemma of Japan's economic growth model. The Japanese economy has long faced problems such as aging population, weak domestic demand growth, and low investment willingness of enterprises. Economic growth continues to be sluggish, and deflationary pressure persists. In order to stimulate the economy, the government has been relying on the expansionary fiscal policy for a long time, and has continuously issued treasury bond to make up for the fiscal deficit. However, the slow economic growth did not bring enough tax revenue growth, making it difficult for the government to improve its debt repayment ability, and the debt scale continued to snowball. At present, the scale of Japan's government debt has exceeded 1200 trillion yen, accounting for 260% of GDP, far exceeding the internationally recognized 60% warning line, making it one of the countries with the heaviest debt burden among developed countries in the world. The economic growth model of living beyond one's means is ultimately unsustainable, and the bond market storm is a concentrated manifestation of this dilemma.

The bond market storm also highlighted the fragility of Japan's financial system. Banks, insurance companies and other financial institutions hold a large number of treasury bond assets. The collapse of treasury bond prices has greatly reduced the value of these financial institutions' assets, and they are facing huge loss risks. Once market panic spreads, it is likely to trigger a crisis of trust among investors in financial institutions, leading to runs and endangering the stability of the entire financial system. In addition, Japanese financial institutions have long relied on the central bank's loose monetary policy, and lack the ability and resilience to cope with risks when the market environment suddenly changes, further exacerbating the fragility of the financial system.

The impact of the Japanese bond market storm has already crossed national borders. As the world's third largest economy and major bond market, the turmoil in the Japanese treasury bond bond market triggered a chain reaction in the global financial market. On the one hand, the rise in the yield of Japanese treasury bond triggered a simultaneous rise in the yield of the global bond market, increasing the global borrowing costs, putting pressure on the financing of enterprises and governments, and curbing investment and consumption. On the other hand, the increasing pressure of yen depreciation has triggered fluctuations in the global exchange rate market, affecting international trade and capital flows. In addition, investor confidence in global financial markets has been impacted, and risk aversion has increased. The prices of risky assets such as stocks and commodities have fallen, further exacerbating market instability.

The current storm in the Japanese bond market has sounded the alarm for the global economy and financial sector. For other countries, when formulating monetary and fiscal policies, it is necessary to fully consider the long-term sustainability and potential risks of the policies, avoid excessive reliance on a single policy tool, and maintain policy flexibility and foresight. In the process of economic development, we should pay attention to the development of the real economy, improve the endogenous driving force of economic growth, optimize the economic structure, and avoid overly relying on debt driven growth models. At the same time, financial institutions should strengthen risk management and enhance their ability to resist risks. Regulatory authorities also need to strengthen their supervision of the financial market and maintain the stability of the financial system.

The Japanese bond market storm is the overall outbreak of long-term accumulated problems in Japan's economic and financial sectors, which not only has a huge impact on Japan's own economic and financial system, but also has a profound impact on the global economic and financial markets. It reminds us that on the path of economic and financial development, we must maintain a clear mind, face problems squarely, actively reform and innovate, in order to achieve stable and sustainable economic and financial development.