From the Price Report (Great Britain) –
Trying to short Japanese government bonds (JGBs) has been labelled “the widowmaker” for as long as I have been working. Throughout the 1990s and thereafter it seemed logical to bet against JGBs given that Japan had become the most indebted developed government in the world.
But the bond market had other ideas.
Japan specialist Peter Tasker writes in the Nikkei Asian Review:
Counter-intuitive though it may appear, the more government bonds Japan issued the lower bond yields fell. In 1990 Japan had next to no public debt and 10-year bond yields were 6%. Today, after 25 years of fiscal deficits, Japan’s 40-year bond commands a yield of 0.1%. If the markets were dissatisfied with this state of affairs, you would expect to see a sell-off in the currency. Instead the yen has been uncomfortably strong.
What everybody seemed to miss was the equally dramatic changes on the other side of the national ledger. The deficits of the Japanese government was more than matched by the surpluses of the private sector, specifically the corporate sector which swung from being a borrower to a large provider of funds to the economy. To a greater or lesser extent this same syndrome is visible today across the developed world.