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Back in November 2024, China’s 30-year bond yield fell below Japan’s for the first time in history. It was a big deal at the time, both encapsulating and fanning the fears that China was succumbing to “Japanisation”.
But that was just the start. A year later, China’s 10-year yield also fell victim to Japanisation, or Japanification if you prefer. That was “a historic crossover that may reignite fears the world’s No. 2 economy is sliding into the deflationary spiral that paralysed its neighbour in the 1990s” according to Bloomberg at the time.
Then, in March, two-year yields did the same. And last week, even China’s 12-month bill yield briefly moved below Japan’s:
Now, you could be a stickler and say that bonds are typically considered fixed income securities that mature in more than a year, and every maturity below that is usually referred to as a bill.
Moreover, China and Japan’s three-month bill yields have not yet converged — at pixel time there’s still 15 basis points in it — so a pedant might point out that either full Japanisation happened when the two-year yields crossed paths in March, or that it has yet to happen.
To that Alphaville says, yes, it’s true. But we only noticed it today, and that’s what matters to us. By the time the three-month yield has converged, if it ever does, we might have other things on our minds.
Anyway, there’s no secret to what is going on here. Japan’s economy has finally emerged from deflation, and the Bank of Japan is expected to raise interest rates to 1 per cent later this month. Which may sound paltry, but for Japan it’s stratospherically high — the highest since Windows 95 was the hottest OS in the world and Steve Ballmer and Bill Gates celebrated its launch like this:
Meanwhile, China’s economy is sluggish, Chinese real estate continues to struggle, the debt overhang is monstrous, and the country’s demographics are bad. Plus, some investors think Chinese bonds are an attractive, safe diversifier for portfolios, weighing further on yields.
In other words, the flip between Chinese and Japanese bond yields might last for a while.
Further reading:
— China is not Japan. But its real estate market has been doing a darn good impression (FTAV)
— China’s bond market is screaming deflation (FTAV)
— China’s Japanification (FTAV)
— The new widow-maker trade (FTAV)
