The world makes much less sense than you think. – Daniel Kahneman
The world makes much less sense than you think.
Three months ago in, Japan’s Long Bond Joins the Global Repricing, we wrote that Japan’s long-end breakout marked the moment the last anchor of the zero-yield world gave way. For decades, Japanese government bonds kept global term premiums suppressed. When Japan’s 30-year yield broke decisively higher this summer, it signaled that something foundational had shifted. Today, it has become an Asian story with global consequences.
The most important development since then is the inversion between China’s and Japan’s 10-year government bond yields. China, with higher growth and inflation, always offered a premium over Japanese debt. That relationship has now flipped. China’s 10-year yield has fallen below Japan’s equivalent for the first time since the early 2000s, marking a milestone in the region’s rate hierarchy. China is now the low-yield anchor of Asia, and Japan is no longer the region’s outlier.
This inversion did not happen by accident. It reflects a divergence in the inflationary and monetary regimes of the two countries, with inflation driving the shift and policy responding in turn. In Japan, inflation has been running above target for an extended period, something not seen in decades. That persistence has pushed the Bank of Japan toward policy normalization.
Alongside that shift, Japan’s monetary base has been declining over the past year, reversing more than a decade of steady expansion under the quantitative easing era. A combination of elevated inflation, negative real yields and retreat from extreme monetary accommodation has driven long-end yields higher. Political and fiscal uncertainty, including expectations of larger issuance, has added further upward pressure.
China has moved in the opposite direction. Disinflation and weak nominal growth have drawn yields downward. Policymakers have leaned toward easing and credit support in response to slower activity and persistent price softness.
Against this backdrop, the broader implications of the China-Japan inversion are clear. Asia’s yield architecture has flipped, reinforcing a broader theme that has been building for years: The disinflationary framework that governed the global economy for four decades is no longer operative. Higher structural yields, more persistent inflation and larger term premiums are reasserting themselves across developed markets.
Japan's Long Bond Joins the Global Repricing discussed Japan’s long end beginning to shift away from its historical anchor. The inversion with China confirms that the regime has fully shifted. It is reshaping Asia’s yield structure and influencing global bond markets. What began as a breakout has evolved into a reordering of the regional landscape, with effects likely to extend well beyond Asia.
Between the Lines is a weekly blog by DoubleLine Portfolio Managers Sam Garza, Joseph Mezyk and Quant Analysts Fei He, CFA and Sunyu Wang that breaks down topical macro and market issues. For questions or suggestions please e-mail us at betweenthelines@doubleline.com. The views and opinions expressed herein are those of the authors and do not necessarily reflect the views of DoubleLine Capital LP, its affiliates or employees.
