Wednesday, May 5, 2010

From the perspective of the Japanese household

Japanese bonds – yielding close enough to zero – have been a fantastic investment for about twenty years. 

After all seven year JGBs were yielding above 1 when I was (unfortunately) short them.  Nominal prices were dropping more than three percent per year.

So the return on owning JGBs was over 4 percent real per year.  Tax only applied to the nominal part of the return – so the post tax return was about 4 percent per year REAL.

Now how long did you need to hold stocks to get a 4 percent post-tax real return? 

Mrs Watanabe with her large JGB holding has seemingly done OK.

Just saying…





IF said...

Nothing to see here. Keep walking.

Anonymous said...

shorting JGB's - the trade of the decade according to many great investors including paulo pellegrini and even your old employer kerr seemed to be putting that position on again and acknowledging the timing aspect>>

However I wonder;
- is it crowded trade?
- deflation is still as far as the eye can see
- cultural differences?
- yen risk of depreciating significantly and negating return?

John Hempton said...

I am just acutely aware that I lost money (don't blame Kerr). I am just reading endless bloggers/press about how bonds are a terrible investment.

I am not so sure - but only in the once-bitten-twice-shy sense.


But What do I Know? said...

They are only "real" returns if you cash them in--I don't imagine Mrs. Watanabe is. She'll sit on the bonds until maturity which will make the whole principal fluctuation moot (and besides, if she sold them she would most likely have to pay capital gains tax--don't know what that is in Japan, but it would cut into the return.)

But your point about govies is well-taken: the trade against them seems so obvious that it is probably not a good trade (at least in the short run.) I think the thing which is most attractive about the short bond trade is not the certainty of the reward but the potential payoff and the defined downside risk--albeit one with negative carry which can go on for a long long time.

John Hempton said...

Cash has a positive 4% real post tax return when deflation is 4%. And it is cashed in all the time.

Mrs Watanabe has been just fine.


But What do I Know? said...

Thanks--I misunderstood your point about real returns coming from deflation.

Bleichröder said...

short JGBs long Yen for the Japan death squeeze- short yen is an extremely overcrowded, misunderstood play. This is a country that has exhausted its policy options through decades of mercantilist bureaucratic authoritarianism- if JGBs start getting hit, the MOFs only option would be to start liquidating US assets to defend the bond market.

At anything approaching a market rate the government is already insolvent. As with shorting any fraud, timing is the big question, but the setup is so asymmetrical/reflexive I'm very interested.

Anonymous said...

Good timing...

Anonymous said...


what is the risk / reward for the japanese bond short?

for every 1% rise in yield - how much do you make?

ryanmburke19 said...

Why not just buy Japanese CDS at 70bps? Cheaper cost of carry than shorting bonds and more leverage than buying interest rate caps.

John Hempton said...

I do not know what default means. These are yen bonds issued by the Government of Japan who ultimately control a printing press.


狂猪 said...

Hi John,

Speaking of the printing press, when do you plan to cover your BBVA short? The reason I asked is because I am considering investing in a Spain index ETF such as EWP.

I suspect the market is over reacting to the contagion affect of the Greek crisis. The Greek economy by itself is too small to be a serious issue. The main concern is contagion within the Euro zone. To put that in perspective, the overall Euro zone's public debt level is comparable to that of the US (around 70% of GDP according to IMF). Much of the Euro zone public debt is denominated in Euro. Importantly, the Euro zone also owns the printing press.

I think the key question is when the Euro zone countries will stop fooling around and get serious. Eventually, the ECB will contain the current sovereign debt crisis. It has the print press and therefore has the mean. In the mean time, the market will continue to test everyone's resolve. Lehman has taught everyone the expensive lesson of indecisiveness. Because the Lehman failure has already happened, Europe is unlike to allow a repeat to the same magnitude on the downside. As such, my guess is the European market will turn near or before the market level reached at the end of 2008 (and not the much lower level reach in March of 2009). This is the best I can do on estimating the timing. This is why I am curious as to your plan to cover you BBVA short. What is a good method to estimate timing?

There are a number of reason I like Spain. Like other countries, the belt tightening has already happened in Spain since the start of the financial crisis in late 2008. What remained in the economy is likely the more rigid demands that are more difficult to compress further. I disagree with the view that because Spain couldn't devalue the Euro, it couldn't improve it's competitive position. The Euro from it's recent peak has already devalued more than 20% relative to the dollar. Europe has already gain a huge competitive advantage relative to the US and all the countries that peg to the dollar. Within the Euro zone, Spain is likely to have gained more competitive advantage relative to the healthier countries such as German and France. This is because wage pressure and other cost structure adjustment pressures are higher in Spain than in German and France. Lastly it is cheap. The P/E of EWP Spain index ETF is now probably below 11. German's EWG ETF has a P/E of 23.

Anonymous said...

a veteran yen trader here always says, "no gaijin ever made money shorting JGBs". even though Japan has severe macro, fiscal, and demographic problems, i would bet the day the new JGB short / long OTM payers crowd makes big bucks is not coming soon.

Anonymous said...


It would be interesting to hear what you think the most likely outcome will be regarding inflation vs deflation.

there seems to be some QE and gold is going up, but at the same time europe is going to be cutting spending.

Bleichröder said...

Long yen is probably the best risk/reward. Imagine the effect of all of those dollars captured from decades of structural surplus being repatriated to defend the domestic bond market... hmmmmmmmmm

Anonymous said...

I seriously don't understand the rationale of going long yen in any form.

Owning a yen is having a claim on the future output of the Japanese economy--which is going down from terrible demographics. Therefore, your claim is getting smaller and smaller as time goes on.

At the same time, because of govt deficits and their need/desire to stimulate the economy, there are more and more yen in circulation, ultimately in the form of bank deposits that are essentially sitting there and gathering dust as elderly Japanese prepare for retirement.

At some point, the retiring generation is going to want to want to spend those yen they've been saving up so painstakingly for so long.

What the heck happens to the economy then? it seems to me like a lot of yen chasing a smaller pool of potential GDP... This is something we haven't witnessed in a major industrialized country... ever.

Shorting the JGBs may not be wrong, just really, really early.

Unknown said...

On an economic basis, in theory you would short JPY, but with Japanese being huge savers they also have huge offshore holdings. Unfortunately Japan's economic problems are a slow death, so if a crisis does happen it is more likely to occur overseas, and when that happens huge flows of funds are brought back onshore (Japan) as the Japanese reduce their risk appetite. We are seeing this with AUD/JPY at the moment which "ideally" should be above 85+ but because funds are flowing back onshore from EUR crisis and AUD getting creamed.

It maybe perverse, but it is better to hold JPY simply because it is the most reliable **dodgy** currency...

oh, and Mrs Wanatabe is long AUD/JPY some $40+billion on currency margin accounts. It is expected that if AUD/JPY hits 75, -10% on estimated average entry point, there is a big risk that AUD/JPY will experience a futher deep correction as the positions are unwound.

just a couple of my pennies on the topic

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