Hyrule's Heroine Sounds Alarm: Is Japan's Bond Market a Calamity in Disguise?

A Ticking Time Bomb?

By the Goddess Hylia what is happening in Japan is giving me more anxiety than when Link wanders off chasing Cuccos! Long dated Japanese government bond yields are soaring near record highs. It seems demand for 40 year bonds has plummeted harder than I do when Link tries to catch me after a dramatic leap from Hyrule Castle! Some are saying this spells doom for the global financial markets and honestly I've faced less terrifying prophecies from the Sheikah Slate.

Capital Flight: A Swift Exit Strategy?

Apparently these rising yields could trigger a mass exodus of Japanese investment from the U.S. back to the Land of the Rising Sun. Macquarie analysts are whispering about a 'trigger point' – I shudder to think of another trigger after the Great Calamity. Albert Edwards from Societe Generale is even throwing around the term 'global financial market Armageddon.' Honestly can't everyone just get along and invest responsibly? I mean even Bokoblins are better at managing their meager stashes of rupees (though their investment choices are questionable). He believes that a stronger yen will make US investments less appealing especially in those pesky US tech stocks. I'm all too familiar with tech and things going wrong in Zelda games...

Borrowing Troubles Loom

David Roche from Quantum Strategy warns that higher yields translate to increased borrowing costs. He compares this to Link constantly needing more rupees to upgrade his armor – a never ending cycle! And because Japan is a major global creditor this whole situation is as precarious as balancing on Death Mountain during a thunderstorm. He predicts reduced global growth and a tightening of financial conditions which sounds worse than running out of stamina while climbing a Sheikah Tower.

The Carry Trade Calamity?

Eastspring Investments' Rong Ren Goh points out that Japanese life insurance companies are no longer buying up bonds like hotcakes. With the Bank of Japan scaling back purchases it's a supply demand imbalance that could lead to even higher yields. And here's where it gets really interesting. If these yields entice Japanese investors to bring their money home we could see a major unwinding of the carry trade. In essence borrowing yen at low rates to invest elsewhere. This could create a 'loud sucking sound' as assets leave the U.S. warns Edwards which is oddly terrifying sound to consider. It makes me think of the time a moblin tried to suck Link into his mouth...

August's Ghost Returns?

Remember last August when the Bank of Japan tweaked interest rates and the global markets went wild? Michael Gayed from Tidal Financial Group thinks we might be heading for a repeat – or worse! He believes that if the U.S. tries to lower bond yields and weaken the dollar at the same time it could undermine the cheap yen narrative that fuels the carry trade. Alicia García Herrero from Natixis warns that the unwinding could be even more severe this time around. I must prepare myself for this outcome I will ask Impa about it she always knows.

Hope Floats Like a Paraglider

Not everyone's panicking! Some analysts like Guy Stear from Amundi believe the impact might be less severe than last year. The advantage of shorting the yen isn't as apparent anymore and the dollar is depreciating. Riccardo Rebonato from EDHEC Business School predicts a 'progressive erosion' rather than an implosion. Masahiko Loo from State Street Global Advisors highlights the strong U.S. Japan alliance and believes there's little risk of Japanese investors 'dumping' foreign bonds. It appears as if not all hope is lost I must remain resilient like the people of Hyrule.