Looking to the G7 summit for potentially market changing news is front and center on many analysts’ minds. The summit ending might be where the big news is going to come in. After the summit Japan will be out from under the direct scrutiny of other rich world countries and may look to add more stimulus to the economy by weakening the currency as well as delay the tax hike from 8% to 10%. This is going to be a large factor in the future because it will break down the fundamentals of the JGB market over time.
USDJPY Spot rate (Source: bloomberg.com)
There are three major points in the Japanese economy that must be overcome to have to robust economy and fiscally sound budget. One is the slow growth of the economy, which arguable is being addressed with the first and second arrow of Abenomics. The second is demographic which will no easily be addressed, and the third is structural changes to the economy.
The last point will require investors to have confidence in Japanese government bonds as a safe haven and store of wealth. With the removal of the tax increase another factor in the safe haven mix is being taken away. This puts the government in a weaker position as less and less pensioners buy JGBs (due to demographics) and more debt is required for the deficit and to cover higher interest rates. This will leave the BoJ with little choice but to continue to monetize debts, spurring more inflation, less confidence, and the cycle continues.