Japan provides the statistic of the day so far

Bonds and inflation.  The two are always linked, yes?  It makes sense but I do wonder sometimes when we think about Japan. 

As the headline to this article thunders 'Tokyo Inflation Quickens to Fastest Since 1992'.  Now this is an important statistic as it provided the first guide to inflation post the 1 April tax increase. 

It is interesting though digging down into the numbers that - as in much of the rest of the world - higher utility and property related prices are responsible for much of the increase:

'Today’s data for Tokyo show beer prices rose 3.8 percent in April from a year earlier, electricity rates jumped 8.7 percent and accommodation costs increased 7.4 percent.'

And then there is the wage offset debate...it is ultimately too early to say BUT the inflation underpinnings are starting to be set. 

The statistic of the day for me so far is this one on the Japanese bond market:

'An increase in yields of 1 percentage point would lead to 7.5 trillion yen in capital losses on bond holdings of Japan’s financial institutions'

Japanese bond yields (around 65 bps only for the 10 year) have been an anomaly for a long time with structurally high demand from the Japanese domestic savings system.  But times are a-changing...and it is not just the threat of real losses via higher inflation.  This story appeared on the final page of The Financial Times yesterday and - in the market/M&A frenzy at the moment - did not get that much attention:

Many people have called the top of the Japanese bond market.  It is the true 'widow's trade' but the only way to square this circle is going to be by augmenting the unorthodox / alternative purchasing from the Bank of Japan via more QE.  Otherwise the risk or rationality in the Japanese bond market rises further - and by rationality I mean higher yields. 

Extrapolate that thought and the combination of a weaker Yen / stronger headline Nikkei re-emerges as a trade for the next 12 months.  That speaks to stock picking opportunities rather more than an easy macroeconomic asset allocation call...especially as I remain to be convinced that those wage increases are really coming through. 

Chart below:  US$/Yen exchange rate mapped over the Japanese Nikkei index. 

NB: don't care about the above?  Interesting to see how Japan is partially funding this...by selling international bonds.  Hmm!