The “U.S. debt storm” that has been brewing this week has finally reached Japan, causing significant disruptions in the market. On September 28, Tokyo encountered a trifecta of challenges with stocks, foreign exchange bonds, and bonds all affected.
Japan’s benchmark 10-year government bond yield rose 1.5 basis points to 0.75%, hitting its highest level since September 2013. This surge in bond yields was accompanied by a depreciation of the yen against the U.S. dollar, with the exchange rate approaching the key psychological mark of 150. Meanwhile, foreign capital rapidly exited the market, compounding the issues faced by Japan.
The rise in U.S. bond yields was primarily driven by the surge in international oil prices and increased U.S. inflation expectations. The 10-year U.S. bond yield surpassed 4.6%, its highest level since 2007. This interest rate differential between U.S. and Japanese Treasury bonds led to a significant outflow of foreign capital. According to data from the Japanese Ministry of Finance, foreign investors sold a net 3,025.3 billion yen of Japanese stocks in the week ending September 22, a new record for net sales in a single week.
Derek Halpenny, head of global market research at Mitsubishi UFJ Financial Group, suggested that the Japanese government may intervene in the foreign exchange market if the USD/JPY exceeds 150. However, the government is likely cautious about further intervention due to potential repercussions and the need for understanding from the U.S. government.
In addition to the bond market, Japanese stocks also suffered a sharp decline. The Nikkei 225 index fell 2.12% during the September 28 session, ultimately closing down 1.54%. This downturn in the stock market can be attributed to the widening interest rate differential and the negative impact of foreign capital fleeing.
The “U.S. debt storm” has not only affected Japan but also caused bond yields to rise in other developed market countries. Germany’s benchmark 10-year government bond yields hit their highest level since 2011. The overall rising bond yields have contributed to increased bond market volatility.
In conclusion, Japan is grappling with the repercussions of the “U.S. debt storm” as its bond yields surge, foreign capital exits the market, and stocks experience a sharp decline. The Japanese government may need to consider intervention measures if the situation worsens, but the threshold for such intervention is higher than many anticipate. The depreciation of the yen, though slow, may hinder the government’s decision to intervene in the currency market.