Japanese debt will not collapse, but Japan may face a short-term

**Source: Wall Street News**  

The economic policies of former UK Prime Minister Liz Truss once triggered a "triple meltdown" in stocks, bonds, and the currency, leaving global markets wary. Now, with Japanese bonds plummeting and the yen weakening, could Japan face a similar crisis?  

According to *Chase Wind Trading Desk*, Citibank's latest research report on June 3 suggests that while Japan's government bond (JGB) system is not at risk of collapse, the Japanese market may experience a brief period of simultaneous declines in stocks, bonds, and the yen over the next 2-3 months (this summer).  

Japan is highly unlikely to face a "Truss moment"-style bond market crash in the near term. However, as short-term investors may unwind yen long positions and Japanese companies increase overseas M&A demand, the yen could depreciate to around 150 against the dollar in the coming months. If rising Japanese yields coincide with a stock market correction, a temporary "triple meltdown" scenario could emerge. Citibank predicts the yen will strengthen in the medium-to-long term, likely breaking through 140 against the dollar in Q4, with any sell-off offering investors opportunities to build strategic long positions in the yen.  

**No Risk of JGB Collapse: Demand to Recover After Short-Term Adjustment**  

Since April, Japanese bonds have weakened significantly, with the 30-year yield briefly climbing to ~3.2% and the 20-year yield reaching 2.6%.  

Citibank previously believed Japanese insurers and other long-term investors would find 20-30 year bonds attractive at yields of 2.0%-2.5%. However, the rapid bond price decline recently triggered risk management concerns, leading to a temporary buyer retreat. Additionally, insurers have largely completed multi-year duration-matching plans, which may explain recent JGB weakness.  

Despite the sharp drop, Citibank sees minimal risk of a JGB collapse. Last week's bond price declines paused, and the report argues yields now meet domestic investors' return expectations, suggesting demand should gradually recover.  

**Summer Alert: Looming "Triple Meltdown"**  

Citibank warns that while JGBs themselves aren't at risk, Japan's financial markets may face a brief "difficult period" this summer (next 2-3 months).  

During July's upper house elections, markets may grow concerned about more expansionary fiscal policies, implying further fiscal deterioration. Fears of the BOJ falling behind the curve also persist, leaving Japanese markets more vulnerable than usual.  

The bank states a yen drop to ~150/USD wouldn't be surprising. If rising yields then trigger a stock correction, a "triple meltdown" could occur. However, higher yields should ultimately improve the yen's supply-demand balance, turning into a supportive factor.  

Citibank forecasts the yen will strengthen beyond 140/USD in Q4 2024. A dip to ~150 could present a mid-term opportunity to build strategic long positions.  

**Is the U.S. the "Invisible Director"?**  

The report highlights a key dynamic: Japan's markets largely dance to America's tune, with strong correlations between USD/JPY and the DXY, Japanese and U.S. stocks, and JGB vs. U.S. Treasury yields.  

Thus, whether Japan faces a true "triple shock" depends on the U.S. script:  

- *"Risk-off" mode (U.S. stocks down + Treasury yields up on safe-haven flows)*: Typically weakens the USD, potentially boosting the yen as a haven. Result: Japanese stocks fall with U.S. peers but yen rises, bond yields up – not a "triple meltdown."  

- *"Growth optimism" mode (U.S. stocks up + yields rise on growth hopes)*: USD may hold steady while the yen underperforms. Result: Yen weakens, Japanese stocks rise with U.S. markets, bond yields up – again, no "triple meltdown."  

Citibank argues a true "Japanese triple shock" would require extreme, low-probability conditions – e.g., a U.S. "stock crash + paradoxical USD surge" combo (rare), triggering Japan's own vicious cycle (yen weakness stoking inflation fears, forcing BOJ hikes, then crushing stocks).  

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