04-23-2016, 11:47 PM
Of course, they also think those negative rates are a bit of a con as Japanese “authorities are attempting to push bond yields down below existing nominal GDP, so that the existing debt can be converted or ‘consolidated’ into a perpetual zero coupon bond presumably before any ‘tapering announcement’.”
We’ve written about all of this before, including Jefferies’ prediction that this will end in a place of NGDP targeting and zero coupon perpetual bonds — a place which will either seem inevitable or barmy in ten years time. However, it’s worth noting that they are doubling down ahead of the April 27 BoJ meeting as the yen refuses to listen to Kuroda and his negative rates — since the BoJ announcement of negative rates, the yen has appreciated around 10 per cent on a trade-weighted basis say Jefferies.
Of course not all Japanese debt is long-term, nor is it all newly issued, but the point is that the market value of its outstanding debt would drop sharply if interest rates rose to even modest levels. If the 30-year rate got as high as 7.0 percent (lower than the U.S. rate in much of the 1990s), then the market price of the newly issued 30-year bond would drop by more than 85 percent from its current level. The way governments typically keep their books, this plunge in the market price would not affect Japan’s debt to GDP ratio. But if the markets were actually troubled by the high ratio of debt to GDP, Japan could simply issue new debt to buy up old debt at a fraction of its face value. This would quickly send its debt to GDP ratio plunging. (This is why the Reinhart-Rogoff 90 percent cliff story never should have passed the laugh test even before the exposure of the famous Excel spreadsheet error.)