Bingo!
This, basically, is the portfolio channel. Problem is that it just doesn't seem to work in Japan, somehow.
Newbie macroeconomic question to anyone knowledgeable
- Thread starter Pluralsight
- Start date
This, basically, is the portfolio channel. Problem is that it just doesn't seem to work in Japan, somehow.
Thanks for your comments. Always instructive, useful, and appreciated.
If you want to learn about macro economics you better avoid zerohedge and spend your time reading other sources.
Indeed, this is the case. The Japanese Government wants the population to start spending their money. This would drive inflation up and that would give the BoJ room to increase the interest rate from a negative value to a positive value.
However, the people feel that they don't have enough money in their wallet to spend. The Government is pushing companies to increase wages, but they are not bulging. The majority of the jobs are in small and medium-size companies which are not profitable and thus have no money available to increase wages. Large size companies are, generally, profitable but also they are hesitant to increase wages. They rather squeeze more money out of their suppliers (i.e. the small and medium size companies).
And there is a very simple and logical answer to that: what else should a risk averse Japanese invest in? They don't want to take on more risk, and domestically there simply were no other palatable investment opportunities. Buying highway/toll road bonds? Lack of opportunities but especially lost trust in the system and the sense of safety by sitting on cash in uncertain times is one very big reason Japanese don't invest in anything risky. That and the simple fact that they don't need stuff they perceive as being inferior. Americans keep on pushing Germany and China and Japan on reducing trade surpluses with the US. Well how does that work? All Japanese now consider buying an inferior Ford over their Nissan or Honda? Japanese have an unshakable belief in the superiority of their culture and economy. Not at any point in time, whether global financial crisis or what have you did I ever get the sense of urgency with people around me when I lived in Tokyo for close to a decade.
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Funny way to put it 
Japanese know they at least get their money back with JGBs. They don't know that with any other foreign investment. They may get back 100 cents on the dollar of a US treasury or may even earn from a US equity investment in nominal terms but still lose in case of unfavorable exchange rate moves. For a highly risk averse person that is a big deal. Also keep in mind the average person with money on the side is not your 30 to 50 year old, because they are incredibly squeezed in Japan. It's retirees and for them it makes no sense in terms of financial planning to embark on some risky escapades.
Japanese know they at least get their money back with JGBs. They don't know that with any other foreign investment. They may get back 100 cents on the dollar of a US treasury or may even earn from a US equity investment in nominal terms but still lose in case of unfavorable exchange rate moves. For a highly risk averse person that is a big deal. Also keep in mind the average person with money on the side is not your 30 to 50 year old, because they are incredibly squeezed in Japan. It's retirees and for them it makes no sense in terms of financial planning to embark on some risky escapades.
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I was reading up on bonds on investopedia. This is from their site:
"
The Timing of a Bond's Cash Flows and Interest Rates
The timing of a bond's cash flows is important. This includes the bond's term to maturity. If market participants believe that there is higher inflation on the horizon, interest rates and bond yields will rise (and prices will decrease) to compensate for the loss of the purchasing power of future cash flows. Those bonds with the longest cash flows will see their yields rise and prices fall the most. This should be intuitive if you think about a present value calculation - when you change the discount rate used on a stream of future cash flows, the longer until a cash flow is received, the more its present value is affected. The bond market has a measure of price change relative to interest rate changes; this important bond metric is known as duration.
"
Does that mean that if investors perceive inflation on the horizon, that they sell their long term government bonds? Also is it correct to assume short term interest rate they mean any US government bond less than 5 years, while long term more than 10 years?
I also didn't understand this paragraph:
"For example, a change in short-term interest rates that does not affect long-term interest rates will have little effect on a long-term bond's price and yield. However, a change (or no change when the market perceives that one is needed) in short-term interest rates that affects long-term interest rates can greatly affect a long-term bond's price and yield. Put simply, changes in short-term interest rates have more of an effect on short-term bonds than long-term bonds, and changes in long-term interest rates have an effect on long-term bonds, but not short-term bonds."
What is a change in short term rates that does not affect long term rates? Are we talking about trading related bond price changes or central bank decisions here? And what is a change in short term interest rates that affects long term rates (Is that the central bank decision)?
"
The Timing of a Bond's Cash Flows and Interest Rates
The timing of a bond's cash flows is important. This includes the bond's term to maturity. If market participants believe that there is higher inflation on the horizon, interest rates and bond yields will rise (and prices will decrease) to compensate for the loss of the purchasing power of future cash flows. Those bonds with the longest cash flows will see their yields rise and prices fall the most. This should be intuitive if you think about a present value calculation - when you change the discount rate used on a stream of future cash flows, the longer until a cash flow is received, the more its present value is affected. The bond market has a measure of price change relative to interest rate changes; this important bond metric is known as duration.
"
Does that mean that if investors perceive inflation on the horizon, that they sell their long term government bonds? Also is it correct to assume short term interest rate they mean any US government bond less than 5 years, while long term more than 10 years?
I also didn't understand this paragraph:
"For example, a change in short-term interest rates that does not affect long-term interest rates will have little effect on a long-term bond's price and yield. However, a change (or no change when the market perceives that one is needed) in short-term interest rates that affects long-term interest rates can greatly affect a long-term bond's price and yield. Put simply, changes in short-term interest rates have more of an effect on short-term bonds than long-term bonds, and changes in long-term interest rates have an effect on long-term bonds, but not short-term bonds."
What is a change in short term rates that does not affect long term rates? Are we talking about trading related bond price changes or central bank decisions here? And what is a change in short term interest rates that affects long term rates (Is that the central bank decision)?