Japanese Government Bond (JGB)

What’s a JGB?
Japanese government bonds are casually called JGBs, just as US government bonds are called Treasuries and UK government bonds Gilts. Each one funds government operations and is considered to be risk-free because, in theory, governments always pay back — even if they need to raise taxes or print more money to do so.

All government bonds are issued in the country’s own currency, while sovereign bonds are issued in foreign currencies. JGBs are government bonds, so they’re sold in yen to fund Japanese government operations. They’re traded worldwide.

Jason’s discussion
More than 95 percent of JGBs are owned by Japanese banks, insurance companies, pension funds, and citizens, who used to save a lot more than do citizens of most other countries. From 1960 to 2000, Japanese households saved over 10 percent of their income, and over 20 percent in 1974-78. Since 2004, however, their savings rate has declined to about 3 percent. Why? The population is getting older, the younger generation is more interested in consumption, and Japan’s economy just plain stinks with real income growth flatlined.

Japan is deeply in debt and having trouble financing its government operations. That’s why you hear and read about JGBs a lot. As Japan’s population ages, who will buy JGBs? Japanese retirees want income, not further investing, so pension funds in Japan are switching from JGB buy mode to sell mode in order to meet redemption requests.

The day Japan finds too few buyers inside its borders and is forced to sell most JGBs to the world market is called “X-day” because global investors will demand higher interest rates on the bonds than Japanese funds and citizens have been willing to accept. Global investors need compensation for the risk of lending money to deeply indebted Japan, and it’s possible that nobody will buy JGBs unless they’re offered at an interest rate that’s too high for Japan’s government to afford. X-day has been widely forecasted and expected for years, but has not yet arrived. SMBC Nikko Securities predicted in June 2011 that X-day would arrive sometime after 2015.

How to use JGB at a cocktail party

“Hey, Hyrum,” you say, “did you see JGB futures on Friday?”

“See what?”

JGBs. You know, Japanese government bonds.”

“Oh, those. Sure did. Hard to believe they’re still rising.”

“Because of Japan’s runaway debt, you mean?”

“Right, and because they’ve been going up for six months.”

“With all the trouble in the eurozone, people are looking for safety. Bonds are it, I guess. Another Salty Dog for you?”

How JGB shows up in the news

Japanese government bond futures inched up on Friday, taking their cue from a rise in US bonds, but gave up some gains…

– Reuters

Analysts said it would make sense for China to be buying Japanese debt as part of its foreign exchange reserves partly because it would provide a hedge against earlier diversification into euros and commodity currencies. Japan and China are also huge trading partners, and the JGB and yen markets are highly liquid.

– The Financial Times

An auction of two-year Japanese government bonds saw slightly weak bidding on Tuesday due to the sector’s low yield, but analysts said demand for short-term JGBs will remain generally firm as long as the Bank of Japan keeps its easy monetary policy.

“With the BOJ’s very easy policy, no one need worry about demand in the two-year sector, regardless of economic and market conditions,” said Masahiro Oda, a senior fund manager at Daiwa SB Investments.

– MarketWatch

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