Nov. 15, 2013
Japanese government debt currently stands at an astonishing 240% of GDP. The BOJ is buying 70% of all net government bond issuance, helping to keep rates contained, but an improving economy and a weakening currency are pushing inflation up to its highest level in years. The IMF now forecasts inflation to rise to 2.9% next year – its highest level in more than two decades and more than twice as high as its current readings. The last time Japanese inflation was that high, 10 year Japanese government bond yields stood at 6%, offering investors a real yield of over 3%. Today, 10 year JGBs yield just over 0.6%.
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Over the past few days, the Yen has started to break out of it’s 6-month consolidation pattern, which may point towards significant further weakness in the weeks and months ahead.
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Today, JGB yields are also moving higher, as a weaker Yen will increase inflationary pressures going forward. The JGB charts are also quite interesting.
First on the long term (monthly) candlestick chart, we see a textbook hammer pattern in April, with the reversal signal confirmed by the sharp rise in yields in the following month. Trading since then has been characterized as an overlapping, choppy consolidation pattern.
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On the daily chart, we see that the consolidation of the April / May rise in yields has now retraced 61.8% of the initial move, falling back towards the body of April’s hammer, where they appear to have established a short term base. From here, yields can now begin to make their next move higher.
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First confirmation of a renewed push towards higher yields will come with a break of the descending trendline off the May highs and a higher weekly high above 0.68%. Where the market can go beyond that is anyone’s guess, but it could be meaningfully higher. If the initial advance from 0.325% to 1% was wave 1 of an unfolding five-wave advance, and the subsequent consolidation was wave 2, Elliot wave theory suggests that the wave 3 advance could easily carry yields up towards 1.25% or higher. Rising inflation and worsening fiscal issues may, however, argue for an even larger move.
Happy Trading,
D
