The Yen Turns
How Japan's bond-market upheaval threatens South African portfolios
Davos is not the biggest economic story this week despite market whiplash over President Trump’s Greenland ambitions. Its Japan.
Following Prime Minister Takaichi’s snap election announcement on Monday on 19 January, markets reacted with a significant sell-off in Japanese government bond - with the 40-year JGB yield surging to a record high of over 4% earlier this week.
For more than three decades, Japan has been the world’s most obliging creditor. Its institutions, awash with savings and starved of domestic returns, have funnelled trillions of yen into foreign assets—American Treasuries, European corporates, emerging-market equities. This vast pool of capital, seeking yield wherever it could be found, has quietly underpinned global asset prices from Manhattan to Mumbai. Now that arrangement is unravelling.
Japan’s 40-year government bond yield has surged to levels not seen since the 1990s, a dramatic rupture in what was once the world’s most somnolent debt market. The implications stretch far beyond Tokyo. For South African investors, the tremors from Japan’s bond market may yet prove more consequential than any number of load-shedding schedules or mining strikes.
The great reversal
The mechanics are straightforward, if unsettling. When bond yields rise, bond prices fall. Japanese financial institutions—pension funds, insurers, regional banks—are sitting on substantial losses. They face an uncomfortable choice: absorb the hit or sell foreign holdings to plug the gap. Many appear to be choosing the latter.
This matters because Japan has been a net exporter of capital on an extraordinary scale. The carry trade—borrowing cheaply in yen to invest in higher-yielding assets abroad—has been one of the most crowded trades in finance. As Japanese yields rise and the yen strengthens, that trade turns sour. Suddenly, borrowing costs are higher, foreign returns look less attractive in yen terms, and currency moves amplify the losses. The incentive to exit becomes overwhelming.
The unwind is self-reinforcing. As Japanese investors sell dollars, euros or rand to buy back yen, they push up the Japanese currency and depress others. This makes their foreign investments even less valuable when converted home, accelerating the rush for the door. It is a familiar pattern: what rises smoothly can fall with alarming speed.
Trouble at the tip
South Africa is particularly exposed to such global convulsions, though the effects are likely to pull in opposite directions. The rand, that perennial anxiety of the investment class, faces a complicated calculus. On one hand, emerging-market currencies tend to suffer when risk appetite wanes, and a surge in the yen amid carry-trade unwinding is rarely kind to them. Capital flight would weaken the rand as foreign investors abandon South African assets.
On the other hand, surging precious-metal prices—a near-inevitable consequence of global financial stress—boost South Africa’s export revenues and improve its current account. Higher gold and platinum prices mean more dollars flowing in, which supports the currency. The net effect depends on which force dominates: the flight from risk assets or the flight to hard assets.
History offers some guidance. During periods of acute financial stress, the risk-off trade typically wins initially. The rand weakens as investors dump equities and bonds. But if the crisis persists and precious metals continue their ascent, the export effect kicks in. The rand may stabilise or even strengthen, particularly if mining companies repatriate their dollar earnings. Much depends on the speed and severity of the Japanese unwind. A sharp, disorderly deleveraging would likely hammer the rand before any precious-metals tailwind could offer relief. A slower adjustment might allow the offsetting forces to balance out.
Equities would feel the strain too. Foreign investors hold substantial stakes in JSE-listed companies, particularly the large miners and financials. If Japanese and other global institutions pare back emerging-market exposure, South African stocks may be sold regardless of their intrinsic appeal. In a deleveraging, all assets become equally dispensable.
The bond market offers little refuge. While South Africa’s fiscal dynamics differ from Japan’s, a global rise in yields makes borrowing more expensive everywhere. The government already faces tight constraints; higher global yields could push up the cost of servicing debt just when it can least afford it. Meanwhile, credit spreads—the extra return investors demand for risk—are widening across emerging markets, a reliable harbinger of capital flight.
Perhaps most troubling is the liquidity question. When large institutions are forced sellers, markets can seize up. Even sound assets get dumped. The rand, never the most liquid of currencies, tends to weaken sharply in such conditions. For South African investors, this is less a matter of picking winners than of surviving the stampede.
Reading the runes
The warning signs are worth watching. The yen-dollar exchange rate is a useful gauge: a rapidly appreciating yen suggests carry trades are being unwound in earnest. Credit spreads in emerging markets tell a similar story. If investors are demanding ever-higher premiums for risk, capital is probably heading for the exits.
In Johannesburg, unusual volatility in foreign-owned stocks—miners, banks, the usual suspects—may signal trouble. These are the counters international investors sell when they need cash quickly. South African government bond yields, too, bear monitoring. If they rise sharply without domestic cause, global contagion is likely at work.
The policy trilemma
History suggests that when sovereign debt markets wobble, authorities intervene. The Bank of Japan might expand bond purchases to cap yields. Central banks elsewhere could coordinate liquidity injections. Such moves might calm markets, at least temporarily. But they come at a cost. Monetary expansion risks inflation and currency depreciation—hardly comforting for South Africans already grappling with a weak rand and rising prices.
This creates an awkward calculus. Policy intervention might avert a market rout, but the medicine—more money-printing—could prove as painful as the disease. For investors, this argues for holding assets that retain value when currencies depreciate: gold, platinum, perhaps selective real estate.
The golden lining
Here, at least, South Africa finds itself on the right side of history. When sovereign debt wobbles and currencies look suspect, investors flee to precious metals. Gold and silver prices have already surged as the Japanese drama unfolds, and further gains look probable if the situation deteriorates. For South African miners and exporters, this is unambiguous good news.
The country remains among the world’s largest producers of platinum-group metals and a significant gold producer. Higher precious-metal prices boost mining revenues directly. They also improve the economics of marginal operations, potentially extending mine lives and supporting employment. Listed miners—AngloGold Ashanti, Sibanye-Stillwater, Harmony Gold—stand to benefit handsomely. Their share prices may rise even as the broader JSE struggles, offering South African investors a rare domestic hedge against global turbulence.
The export channel matters too. Higher gold and platinum prices mean more dollar revenues flowing into South Africa, improving the current account and supporting the rand. Mining exports, for all the sector’s travails, still constitute a meaningful portion of foreign-exchange earnings. When metal prices surge, the effect on the balance of payments is tangible.
Bracing for impact
What, then, should South African investors do? Diversification, that hoary old counsel, matters more than ever. Some exposure to hard assets—precious metals especially—provides a hedge against financial turbulence. Currency hedging for foreign investments deserves reconsideration, though the timing of rand movements remains fiendishly difficult to predict.
Above all, liquidity is essential. In a scramble for safety, those with cash can wait out the panic and pick up bargains. Those without may be forced to sell at precisely the wrong moment. The trick, as ever, is to be solvent when others are not.
After the deluge
Japan’s bond-market upheaval is a reminder that even the most durable financial arrangements can crumble. For decades, the assumption of abundant Japanese capital seeking returns abroad has been a fixture of global finance. If that assumption no longer holds, the entire edifice of capital flows may need rebuilding.
South African investors have weathered storms before—the 2008 crisis, the COVID-19 panic, any number of domestic political dramas. This may prove another test. The difference is that the danger now comes not from Pretoria or even Washington, but from Tokyo, a city whose bond market was supposed to be the dullest in the world. It turns out that dullness, like stability, is not a permanent condition. The yen has turned. South African portfolios may soon follow
Source: Financial Times