JGB Yields – A Bullish Consolidation

Abe Seeks 'Redemption'

Shinzo Abe, father of the latest attempt to 'reflate' the Japanese economy by devaluing the money issued by the BoJ and by government spending even more money it doesn't have, is said to be seeking 'personal redemption' by winning the upcoming upper house election.

“Japanese Prime Minister Shinzo Abe is a man with a mission: to erase the bitter stain of defeat and attain personal political redemption with a victory in a national election this month.

With his Liberal Democratic Party-led coalition (LDP) back in power since December and all but assured of a handsome win in a July 21 poll for parliament's upper house, Abe might forgiven for slowing his pace a bit. But allies and critics agree the 58-year-old heir to an elite political family will not rest until the votes are counted and his ruling bloc is in control of the chamber, reversing a humiliating defeat that led to his resignation six years ago.

"I guess history is a turn of Fortune's wheel. The LDP led by Prime Minister Abe suffered a crushing defeat in the last (2007) upper house election, which led us to lose power," Abe's close ally Chief Cabinet Secretary Yoshihide Suga told a news conference last week as the official campaign commenced. "We must resolve the split in parliament through this upper house election. By doing so, Prime Minister Abe can finally get his revenge from the defeat of six years ago."

Upper house lawmakers serve six-year terms and half the seats are contested every three years, so the seats to be filled in the coming election are those that were at stake in 2007.

When he succeeded popular Prime Minister Junichiro Koizumi in September 2006, Abe – then aged 52 – had high support ratings. Ten troubled months later, his popularity eroded by scandals in his cabinet and public outrage over lost pension records, Abe led the LDP to its worst election defeat since it was founded in 1955.

He clung to power for another two months before suddenly quitting in the face of a deadlock in parliament, where the opposition-controlled upper house was blocking a key bill, and ill health due to a flare up of his chronic ulcerative colitis.

Two years and two more LDP prime ministers later, the LDP lost power to the novice Democratic Party of Japan in an historic 2009 lower house poll.

"The setback then has been deeply embedded in my heart," Abe told a news conference after parliament ended its session late last month. "I cannot lose the upper house election."

(emphasis added)

Well, as everybody knows, Abe has made a pilgrimage to some shrine 'deep in the mountains' in order to be 'reborn'. Therefore, nothing can go wrong. There is however another reason to believe that he will win the election and subsequently control policy 100% (as the upper house will then no longer block any legislation his government proposes). The reason is the chart pattern of the 10 year JGB yield.

JGB Yields About to Break Out?

A daily chart of the 10-year JGB yield, showing the move since the spike low that was achieved shortly after the BoJ announced its huge debt monetization program in April. Since May, yields are consolidating in a symmetrical triangle – via Investing.com – click image to enlarge.

The symmetrical triangle pattern on the daily 10-year JGB yield chart is a highly reliable continuation pattern. We would in fact argue that a breakout is not very far away – the pattern is closing in on the triangle's apex. Due to the pattern's long gestation period, the eventual move higher can be expected to be quite sizable.

This should play havoc with the capital ratios of Japanese banks and hasten the arrival of a fiscal crisis in view of the huge public debt amassed by the government. Even with yields below 1%, debt service costs have begun an inexorable climb due to the sheer size of the outstanding debt. In this year's budget, debt service alone amounts to 25% of the government's total expenditures. 50% of the budget is debt-financed and in addition to debt service, social security costs are on an explosive path higher. In other words, Japan's government debt has already clearly morphed into a Ponzi scheme.

Given that the inflationary policy the BoJ has embarked on is likely to be maintained or even intensified once Abe wins the upper house elections, it wouldn't be surprising if the breakout in yields were to follow on the heels of the election. This is likely going to have implications for the whole world in our opinion. Japan and its public debt remain the ultimate 'gray swan' (i.e., a 'black swan' the existence of which everybody knows about, but tries to studiously ignore based on the idea that nothing bad can happen because it hasn't happened yet).

Stay tuned.

Source: Acting Man

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