Why Japan's long-battered bond market may be gearing up for a comeback

Saber-tooth tiger. Wooly mammoth. Japanese government issued bonds?

Well it's happened. After years of enduring an unrelenting bear market (marked by plunging yields and rising prices) -- the long-battered Japanese government bond has made it on to the endangered financial species list.

Asks one October 26 Reuters: "JGB's on the edge of extinction?"

The prognosis isn't looking good. In late October, the yield on the 10-year JGB plunged below .300% for the first time in six months. While everyone from Japanese retailers to foreign investors continue to abandon the JGB for other higher-yielding assets.

Which begs the question, why is Japan's bond market facing annihilation?

Well, according to the mainstream financial experts, the ultimate poacher of the JGB is the Bank of Japan itself. Huh?

Okay, here's where things get a bit complicated. And if you happen to need a cure for insomnia, by all means, pick up a book on the Bank of Japan's monetary policy changes and its impact on the value of long-dated securities.

But for the sake of time and sanity, here's a much simpler explanation: The introduction of quantitative easing (or QE) has brought about the collapse in bond yields. Namely, the Bank of Japan's commitment to buy government bonds by the fistful, all the while keeping interest rates at a historic 0%.

Even simpler: The BOJ buys bonds, their prices rise, and yields fall. (Because prices and yields of all bonds move inversely to each other.)

Here the news headlines go:

"The belief that the BOJ will carry out monetary easing pushed long-term yields below the .3% threshold." (Bloomberg)

"The yield on Japanese government bonds is almost nonexistent, due to the Bank of Japan's aggressive yen printing." (Reuters)

"Amidst the Bank of Japan's easing, Japanese interest rates are unlikely to rise. We have to look into diversifying our investments." (Reuters)

But there's one problem with this logic. If rate cuts and QE caused bond yields to fall -- then why did bond yields also fall amidst rate hikes and an absence of QE?

Here, we have a chart of the Bank of Japan's interest rate policy since 2006. Notice: In July 2006, the BOJ ended its zero-rate policy (in place since 2001), and embarked on its most radical rate hike campaign since the late 1980s -- until 2007.

During this time, however, the JGB yield turned down, not up -- as the conventional logic would suggest -- as the next chart shows:

So, clearly Japan's bond market is not following the cues of its central bank. But make no mistake, it is following a very clear pattern -- an Elliott wave one, and more.

Here, our October 2015 Global Market Perspective's three-part Special Report on Japan shows you how the 10-year Japanese Government Bond is not only adhering to a 69-year long Kondratieff cycle -- but also, to the most common Elliott wave pattern, a five-wave impulse which began in the 1960s.

Here is an excerpt from the Special Report:

"The monthly chart at right shows that yields remain within a trend channel that has mostly contained wave 5 (circle) over the past nine years. The upper line of the channel runs through the zero percent level in mid-2018. In theory, yields could fall that low. However, the momentum of the decline has already begun to register divergences-versus the 2003 and 2013 lows..."

"For those who follow Elliott wave analysis, the writing is on the wall: The next move Japanese stocks, interest rates, and the economy appears to be... in line with the Kondratieff Spring phase."

Remember the famous line from the movie Field of Dreams -- "If you build it, they will come."

If the 10-year JGB yields continue to build toward a major bottom, as our charts suggest -- then the opportunity of a lifetime will come for investors on the right side.

Now for the best part: From now until November 18, the entire 3-part Special Report on Japan is available to our Club EWI members.

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