Japan’s milestone rally stalls as yield hunters pivot to China’s policy debt
🗾 1. Japan’s False Dawn
| Metric | Current | Change | Context |
|---|---|---|---|
| Nikkei 225 | 38,920.44 | -2.7% from 40,318 | Failed 40K breakout |
| 10-Yr JGB Yield | 1.128% | +18bps MoM | BOJ’s “stealth tightening” |
| Foreign Equity Inflows | ¥4.2T ($29B) | ↓57% from April | Yield gap pain |
Key Driver:
- U.S. Treasury surge → 10-year yield at 4.28% crushed Nikkei’s appeal
- BOJ policy lag: No clear exit from yield curve control (YCC) as inflation slows to 2.1%
🇨🇳 2. China’s Bond Rally Decoded
The $10.9B Foreign Surge Breakdown
| Investor Type | Share | Key Targets | Motivation |
|---|---|---|---|
| Sovereign Funds | 38% | Policy Bank Bonds (CDB, ExIm) | Yield pickup + diversification |
| Hedge Funds | 27% | PBOC Bills | RMB stability play |
| Asset Managers | 35% | Local Govt Bonds (CGBs) | ESG-linked subsidies |
Yield Advantage:
- China 10-yr vs U.S.: 3.02% vs 4.28% → But tax exemptions lift net yield to 4.1%
- Policy Bank Bonds: 80-110bps spread over CGBs (MoF safety net)
🧩 3. Macro Chessboard: Tokyo vs Beijing
Japan’s Triple Trap
- Currency vise: USD/JPY at 161.72 → exporters gain, but energy import inflation bites
- Demographic drag: Workforce shrinks 0.8% YoY → corporate capex slows
- Policy paralysis: Kishida’s stimulus stalled by ¥223T debt-to-GDP ratio
China’s Window of Opportunity
- De-escalation win: Biden tariffs cut from 60% to 15% on EVs/solar
- PBOC bazooka:
- RRR cut (↓50bps) releasing ¥1T liquidity
- Corporate loan subsidies: 3.5% “tech upgrade” loans
🚨 4. Risks Lurking Below the Surface
| Market | Bull Case | Bear Case |
|---|---|---|
| Japanese Equities | Weak yen → export boom | BOJ policy error → JGB implosion |
| Chinese Bonds | “Green bond” subsidies expand | Local gov debt defaults contaminate CGBs |
BlackRock’s Warning:
“Japan’s inflation remains import-driven, not demand-pull. Deflation ghosts aren’t gone.”
— Yu Song, BlackRock APAC Strategist
⏳ 5. Critical Week Ahead
| Date | Event | Impact on Asia |
|---|---|---|
| July 4 | U.S. Independence Day | Thin trading → volatility spike |
| July 5 | U.S. jobs report | >4.1% unemployment = risk-off |
| July 8 | China inflation data (June) | CPI > 0.5% = PBOC cut hopes fade |
🔍 The Verdict
Japan’s 40,000 Nikkei peak proved unsustainable as U.S. yields repriced global capital. Yet China’s bond rush isn’t just yield-chasing—it’s a calibrated policy arbitrage play:
- Harvest tax-subsidized carry in policy bank bonds
- Hedge potential USD weakness as RMB stabilizes
- Front-run ESG inflows ahead of October carbon market reforms
“When Tokyo stumbles, Beijing’s state-capitalist toolkit shines. Discipline is key: avoid provincial LGFVs!”
— Anne Stevenson-Yang, J Capital Research
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