Edward Conard

Top Ten New York Times Bestselling Author

  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “Unintended Consequences should be read by anyone who takes for granted the superiority of progressive taxation and has not thought carefully about the trade-offs involved.” - The New Republic
  • “Unintended Consequences represents the most cogent and persuasive analysis of the Financial Crisis to date.” - Andrei Shleifer, 1999 John Bates Clark Medal Winner
  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
  • “Unintended Consequences offers deep and well-argued analyses on almost every issue.” - The New York Times
  • “…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “There are an amazing number of good ideas and interesting points made in Unintended Consequences. The thinking underlying it, and the obvious depth of understanding of the author, are very impressive.” - Steven Levitt, coauthor of Freakonomics; 2004 John Bates Clark Medal
  • “A full-throated defense of economic dynamism.” - The Wall Street Journal
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
Upside of Inequality Oxford Unintended Consequences

AI Summary. The author argues that Bank of Japan bond buying holds Japanese long-term government bond yields artificially below levels justified by the country's gross government debt, pushing risk premia into the currency instead and driving the yen lower. On this view, yen depreciation will continue until yields are allowed to rise far more, forcing fiscal consolidation.

Robin Brooks Robin Brooks Substack
Date Posted:

While Japan’s long-term yields have risen, they have not risen enough to stabilize the Yen. Brooks argues that this implies “markets think risk of a debt crisis is rising sharply.”

Does central bank bond buying push risk premia into the currency?

Core argument: The author argues that Japan's 30-year government bond yields remain far too low relative to its gross government debt as a share of GDP because the Bank of Japan continues to buy government debt on a massive scale.

The vertical axis in the chart shows the 30-year government bond yields that go into the rate differential. The horizontal axis plots gross government debt in percent of GDP. While it’s true that the interest differential has moved a lot in favor of the Yen, it’s also true that - given Japan’s monstrous level of government debt - longer-term yields are still much too low relative to where they would be if the BoJ weren’t still a massive buyer of government debt. This bond buying is keeping yields artificially low, which should really be much higher due to risk premia. Because these risk premia aren’t allowed to show up in the bond market, they show up in the Yen instead, which is the reason it keeps falling. Here’s the uncomfortable truth: Japan’s longer-term yields have been rising, but - on a risk-adjusted basis - that rise isn’t nearly enough to stabilize the Yen. Another way to say this: markets think risk of a debt crisis is rising sharply. Yen depreciation won’t stop until yields are allowed to rise far more, forcing the government to pursue fiscal consolidation and bring down debt. Japan needs to stop being in denial.

Takeaways by Macro Roundup® AI

  1. The author argues that Japan's 30-year government bond yields remain far too low relative to its gross government debt as a share of GDP because the Bank of Japan continues to buy government debt on a massive scale.
  2. Because risk premia are suppressed in Japan's bond market by central bank buying, the author contends those premia show up in the Yen instead, driving its continued depreciation.
  3. The author argues Yen depreciation will not stop until Japanese yields are allowed to rise far more, forcing the government into fiscal consolidation and debt reduction, and that markets see the risk of a debt crisis rising sharply.

Related Articles:

  • Japan Raises Interest Rates To Highest Level In 30 Years — The Bank of Japan raised its policy rate by 0.25 percentage points to around 0.75%, a three-decade high, and signalled readiness to continue tightening if conditions allow. The 10-year Japanese government bond yield rose 0.05 percentage points, passing 2% to its highest level since 1999, while the yen weakened to ¥156.77 per dollar.
  • The Global Debt Crisis Builds — Long-dated forward yields such as 10-year and 20-year forwards are near their highs even as the Federal Reserve cuts rates, with the gap between those forwards and 10-year yields widening, which the author reads as a worsening buyers' strike for longer-dated government debt. Italy, France, the UK, Japan and Germany all show elevated long-term forward yields.
  • The Race Between Asset Supply and Asset Demand — The authors estimate that demand for assets has outpaced supply by roughly 400% of GDP versus 100%, making rising asset demand the leading contributor to falling interest rates. They project that debt sustainability requires fiscal consolidation exceeding 10% of GDP, though debt could reach 250% of GDP without raising interest rates.
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