What do US treasury yields, Japanese bond buyers and the yen have to do with commodity prices? Well, maybe a lot more than you think.
Today, we’re uncovering the huge store of wealth held in Japanese savings…where this money has been sitting over the last several decades and why it could flow into critical metal projects over the coming years.
So, let’s kick off today’s update and step back to Japan’s era of decadence…the 1980s.
In many ways, Japan’s economy owned the 1980s — GDP was growing at an average rate of 3.89% per annum, and the economy was booming.
Japanese business tycoons opened the doors to international trade, offering important seed capital for emerging start-ups across the West.
Japan was hitting the mainstream, influencing Western culture and making its mark on Hollywood.
The 1989 blockbuster hit Black Rain was perhaps the pinnacle.
This 1980s classic features Michael Douglas…his character plays a New York City policeman who witnesses a murder and takes down the killer, Sato, a member of Japan’s infamous Yakuza mob.
Douglas’ character transports the gangster back to Osaka for his murder trial. There, Sato’s fellow gangsters free him from police custody…Douglas and his partner are forced to scour Japan’s dangerous underworld of organised crime in search of their fugitive.
But Black Rain’s release in September 1989 coincided with the very top of Japan’s economic prosperity.
After a decade-long bull run throughout the 1980s, the Nikkei 225 index reached an all-time high of 38,957 on 29 December 1989, the last trading day of the year.
The iconic 1980s had concluded and with it…the Japanese economy.
From its momentous peak, the Nikkei proceeded to fall for 18 long years!
It finally bottomed in October 2008 at just 6,994…marking an astounding 89% peak-to-trough decline.
The effects were severe…economic deflation gave rise to the country’s ‘lost decade’.
But in reality, deflation lingered far longer than that.
Making matters worse, the Bank of Japan (BoJ) continued to raise rates well after the 1989 collapse.
The country has lived in a twilight zone ever since…persistent deflation has stifled investment in real estate, equities, and business growth.
It’s created a bizarre economic environment, one in which cash HOLDS its long-term value!
With goods and services typically ‘cheaper tomorrow’…citizens tend to hoard cash, save and limit spending.
It’s also why Japanese investors are major holders of US Treasuries.
Until now, cash and US treasury bonds have remained king in the Land of the Rising Sun.
But the financial world has changed markedly over the last two years.
Japan has lived inside a deflationary bubble for three decades. Yet remarkably, it seems that bubble has now finally burst.
It’s why the BoJ announced that its economy has just passed a major inflection point…
For the first time since the 1980s…inflation is returning to Japan.
The times are changing…and so too are Japanese Investors
Investors in Japan are very different to those from the US, Europe or Australia.
There’s no speculative fervour looking to chase real estate or stock prices higher.
But higher wages and rising consumer goods and services in recent months could bring a return of the 1980s to Japan.
With inflation creeping back, there’s an expectation that deposits in local banks will start to deliver investors higher yields on their savings.
Central banks have also lifted the target range for 10-year government bonds from 25 to 50 basis points.
For the first time since the 1980s, investors can find ‘local’ yield.
It’s creating an enormous exit of US Treasuries…Japanese investors are repatriating their wealth from American shores in mass.
But the impact of inflation is set to flip long-held attitudes…for the first time, the purchasing power of cash is set to decline.
The cautious Japanese ‘saver’ could soon become…the speculative investor.
That has the potential to unleash a tidal wave of capital back into equities and real estate.
But don’t take my word for it…investing legend Warren Buffett just increased Berkshire Hathaway Inc’s exposure in Japan’s five largest listed companies…Itochu Corporation, Marubeni Corporation, Mitsubishi, Mitsui Group and Sumitomo Corporation.
According to Berkshire, the aggregate value of these interests surpasses that of Berkshire-held stock in any country outside of the US.
It seems the world’s most successful investor is betting big on Japan.
If Buffett is right, the ripple effects could be enormous here in Australia.
That’s because this manufacturing giant needs raw materials to expand its manufacturing and industrial muscle.
Japanese firms have traditionally turned to Aussie miners to secure raw materials.
In fact, in my previous life as a geologist, I worked for the WA-based iron ore miner, Crosslands Resources, a wholly-owned subsidiary of the multi-billion Japanese manufacturing giant, Mitsubishi.
However, Japan’s manufacturing giants Toyota, Suzuki, Mitsubishi, Honda, and Nissan…aren’t just hunting for iron ore.
They’ll need critical metals to keep pace with the burgeoning EV trend…lithium, graphite, copper, nickel, and rare earths are the metals of the future and will be key targets for Japanese investors.
Has the time come for Japanese investors to leap out of cash?
If it has, critical metal investments could be a natural fit. These are tangible investments that align closely with Japan’s role as a major vehicle manufacturer.
There’s an emerging but surprising growth story here.
The world’s third-largest economy is rising from its 33-year deflationary coma.
A tidal wave of Japanese capital is set to find a new home and it’s the Aussie miners that could be the big winners from this new trend.
Regards,
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James Cooper,
Editor, Fat Tail Commodities
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