Can someone please tell me how negative interset rates work for Japan?

RGLD · May 10, 2019

At first I thought who in the right mind would buy Japanese Treas with a negative interest rate. But I heard these "investors" make money through deflation????

That sounds extremely complex... You're paying to lend money to the bond but will make more if the currency deflates more???? Why invest at all then? Just hold on to the yen?

tm689 · May 10, 2019

RGLD said:
At first I thought who in the right mind would buy Japanese Treas with a negative interest rate. But I heard these "investors" make money through deflation????

That sounds extremely complex... You're paying to lend money to the bond but will make more if the currency deflates more???? Why invest at all then? Just hold on to the yen?

Institutions buy govt bonds to avoid risk. If the falling price of other assets causes more and more people to seek the safety of those bonds, the price of those bonds are likely to go up. So you might have bought the bonds at a negative interest rate, but if other people want the safety of your bond they will bid up the price of it over what you paid. After all, institutions must put their money somewhere and there are costs (security) and risks of holding actual cash. You could invest in other countries but then you would face other risks and costs such as currency conversion costs.

ironchef · May 11, 2019

tm689 said:
Institutions buy govt bonds to avoid risk. If the falling price of other assets causes more and more people to seek the safety of those bonds, the price of those bonds are likely to go up. So you might have bought the bonds at a negative interest rate, but if other people want the safety of your bond they will bid up the price of it over what you paid. After all, institutions must put their money somewhere and there are costs (security) and risks of holding actual cash. You could invest in other countries but then you would face other risks and costs such as currency conversion costs.

I just don't understand high finance and economics. I am with @RGLD, why don't they just build a vault and store paper currency then?

HobbyTrading · May 11, 2019

In case of Japan, it is my understanding that most government bonds are bought by the Bank of Japan (BoJ). And that there are not many other institutions/investors who buy these.

piezoe · May 11, 2019

HobbyTrading said:
In case of Japan, it is my understanding that most government bonds are bought by the Bank of Japan (BoJ). And that there are not many other institutions/investors who buy these.

Japanese households are heavily invested in Japan's government issued bonds which they bought through their local post office. In addition BOJ owns about 50% of the bonds issued. A Significant amount of Japanese debt instruments are also held by Japanese Corporations. In other words, Japan's debt is held internally to large extent. The consequences of debt held internally versus debt held externally is discussed here:
https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=5&ved=2ahUKEwj007K6gJTiAhVGxVkKHVAMB-QQFjAEegQICRAC&url=https://www0.gsb.columbia.edu/mygsb/faculty/research/pubfiles/52/Japan%27s_Internal_Debt.doc&usg=AOvVaw3Ond-wWY1kZU_sBhMO_Rt7

RGLD · May 11, 2019

I get my info from this video:

I don't know how accurate it is compared to a random person replying on this forum, but on the last part of that video they talk about Japanese investors making their money through deflation. Which perplexes me.

ironchef said:
I just don't understand high finance and economics. I am with @RGLD, why don't they just build a vault and store paper currency then?

I don't think a lot of people know about this ouside of Japanese traders. This and the Carry Trade has very limited information even for people who study Japanese Economics. I can't even find a good article or book that gives me a comprehensive story of the "lost decade". Maybe if i can read japanese i'd find better text.

tm689 · May 11, 2019

ironchef said:
I just don't understand high finance and economics. I am with @RGLD, why don't they just build a vault and store paper currency then?

They can store it in a vault but you needs guards to protect it and insurance to insure against such things as fire or natural disaster. If a fire burns all your currency that negative bond yield would have seemed like not such a bad investment.

HobbyTrading · May 12, 2019

RGLD said:
I don't know how accurate it is compared to a random person replying on this forum, but on the last part of that video they talk about Japanese investors making their money through deflation. Which perplexes me.

This is indeed something which is going on for a very long time already. The Japanese consumers know that prices will be lower next year, so they don't spend now. After Europe and the US stopped their QE programs is Japan the only remaining economy where QE is being done. And they can't get it to work: they are not able to crank up the inflation to about 2% (their target).

Banjo · May 12, 2019

https://wolfstreet.com/2019/05/11/qe-party-over-bank-of-japan-stealth-tapers-further/

ironchef · May 12, 2019

HobbyTrading said:
In case of Japan, it is my understanding that most government bonds are bought by the Bank of Japan (BoJ). And that there are not many other institutions/investors who buy these.

Let me understand this: The Japanese Gov needs money, so the Japanese Gov (BoJ) prints some money and the Japanese Gov (BoJ) bought the bonds and pays itself a negative interest rate for the money it lends itself... My head is spinning.