Japan's stocks, bonds, and currency face a "triple kill," Deutsche Bank: Compared to the volatility of U.S. stocks, the Japanese market is more concerning!

The Japanese financial market is experiencing a storm of "triple kill" in stocks, bonds, and currency. Deutsche Bank has issued a warning that the current turmoil in the Japanese market is more concerning than the recent fluctuations in the U.S. stock market, reminiscent of the crisis in 2022 that nearly destroyed the UK bond market, with a potential risk of capital flight accumulating.

Market turmoil intensified on Thursday. The Nikkei 225 index opened lower and continued to decline, with a drop of nearly 3% at one point. In terms of individual stocks, SoftBank's share price plummeted by 11%, hitting a recent low; Kioxia's share price fell sharply by 16% during the session.

Meanwhile, the yen's exchange rate has fallen to its lowest level since January of this year, approaching a warning line that could trigger intervention by the Bank of Japan.

The bond market is also under pressure, with the yield on 30-year Japanese government bonds rising to its highest level in decades.

The core of this series of chain reactions stems from deep concerns in the market regarding the new government's fiscal policy in Japan. Reports indicate that the Japanese government plans to launch the largest fiscal spending program since the pandemic. George Saravelos, Global Head of Currency Research at Deutsche Bank, stated that this massive stimulus plan, combined with the Bank of Japan's continued dovish stance, is raising concerns about the deterioration of Japan's fiscal situation and shaking investors' confidence in domestic Japanese assets.

Albert Edwards, a global strategist at Société Générale, also expressed similar concerns, describing the rise in long-term Japanese bond yields as "a significant warning signal that is rarely acknowledged by investors." Analysts warn that if investors lose confidence in the Japanese government's and the central bank's commitment to maintaining low inflation, the reasons for selling Japanese assets will become compelling, potentially triggering more destructive capital outflows.

Stocks, bonds, and currency all decline, signs of capital flight expand

Deutsche Bank pointed out in a report titled "This is Worrying" that both the yen and 30-year Japanese government bonds have fallen by more than 5% in recent weeks, while fixed income markets in other parts of the world have rebounded during the same period. This decoupling phenomenon highlights the unique predicament of the Japanese market.

The latest sharp decline in the Japanese stock market is seen as a "clear signal" of the spread of pessimistic sentiment in the market. Deutsche Bank analyst George Saravelos warned that if price volatility in the bond and currency markets spreads to the weak stock market, it will be a sign of an expanding capital flight. **

Thursday's market performance seems to confirm this prediction. Data shows that the yield on 30-year Japanese government bonds has risen above 3.35%, while at the beginning of this month, the yield was only around 3%.

Deutsche Bank Warns: Beware of a Repeat of the 2022 UK Market Turmoil

Analyst Saravelos compared the current situation in Japan to the "Truss crisis" in the UK in 2022.

At that time, the then UK Prime Minister's unfunded tax cut plan triggered panic among investors, causing the pound to fall to a 37-year low and nearly collapsing the UK bond market. Saravelos believes that the Japanese market is sending similar signals: a "loss of confidence" in domestic asset fundamentals.

He stated, "The nominal markets for the yen and long-term Japanese government bonds have begun to decouple from any fair value benchmarks, and the correlation is accelerating intraday."

He further explained that the long-standing stability of the Japanese market relies on a combination of high public debt and high private savings, with stable inflation expectations being the core that sustains it all. Once domestic investors lose confidence in the government's and central bank's commitment to controlling inflation, "the rationale for buying Japanese government bonds will disappear, and capital outflows will intensify."

However, the report also noted that the 2022 UK bond market crisis was exacerbated by forced selling due to the leveraged investment strategies of pension funds, and there are currently no signs of similar leverage risks in the Japanese market.

Massive Fiscal Stimulus and Dovish Central Bank Stance Raise Concerns

The direct trigger for the market turmoil is the spending plan of Japan's new Prime Minister, Sanae Takaichi. Reports indicate that the scale of this plan will be the largest since the COVID-19 pandemic. From the investors' perspective, such a massive fiscal stimulus, combined with the Bank of Japan's unwillingness to tighten monetary policy, will inevitably lead to a deterioration of Japan's fiscal situation.

In the report, Saravelos analyzed that Japan has the highest proportion of government bonds in GDP globally, while also having some of the wealthiest households. This "high public debt, high savings" structure is the cornerstone of its capital market stability. However, the stability of this system ultimately depends on stable inflation expectations. If domestic confidence wavers, the entire system may face the risk of collapse.

Albert Edwards from Société Générale also believes that while the rise in yields is "not yet a panic sell-off, yields are rising continuously, slowly, and relentlessly." He even predicts: "This long-term bear market in government bonds led by Japan is destined to reverse the overvaluation of stocks and real estate markets over the past 40 years."

Follow-Up Focus: Capital Outflows and Official Actions

Currently, the Bank of Japan and the government seem to be tolerating the recent market fluctuations. But Saravelos is skeptical, if the current price trends continue, whether the Japanese government can maintain silence.

**"We will closely monitor whether there are signs of broader capital outflows in the Japanese market in the coming weeks," Saravelos stated, "A clear signal would be if the current price trends spread to a weak stock market, and if Japanese government bonds continue to decouple from global fixed income trends For investors, the "triple kill" situation in the Japanese market indicates that systemic risk is rising. Compared to the short-term volatility of the U.S. stock market, domestic capital outflow triggered by the loss of credibility in fiscal and monetary policies may have more far-reaching and destructive effects.

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