"Warning Issued in Japan Amid 'Stock Market Boom': 'This Could Lead to Shocking Results'"

Japanese Media Warn of Short-Term Investment Risks Amid Bond and Forex Instability

"Reinvesting with Government Bonds as Collateral, Then Using Those as Collateral for Further Loans"

"Low Likelihood That Funds Will Flow Into Consumer Spendin

While the Japanese stock market continues its rally, warnings have emerged locally that the underlying instability in the government bond and foreign exchange markets requires fundamental measures.

According to Yonhap News Agency, on May 11, the Nihon Keizai Shimbun (Nikkei) cautioned that "the nearly 80% increase in the Nikkei 225 Stock Average (Nikkei Index), the U.S. S&P 500 Index, and the Korea Composite Stock Price Index (KOSPI) since the end of last year is driven by overheated investments in artificial intelligence (AI)." The newspaper urged vigilance.

In particular, it noted that "in Japan, the Nikkei Index rose by an average of 7% between February 27 and May 7—right before the U.S. and Israel attacked Iran—while the Tokyo Stock Price Index (TOPIX), which reflects the entire market on a market capitalization basis, actually fell by 2% during the same period."

Nikkei pointed out that a significant portion of the short-term investment capital in the current stock market is being reinvested after borrowing against government bonds as collateral, and then used as collateral for further loans—essentially "money circulating within the financial market." The likelihood that these funds will flow into consumer spending or capital investment is said to be low.

The newspaper also warned that "while government bonds are typically classified as safe assets, if an unexpected event occurs—such as the 2022 UK 'Truss Shock'—a massive sell-off of government bonds could take place, causing liquidity to dry up rapidly." The 'Truss Shock' refers to the episode in which then-UK Prime Minister Liz Truss announced a large-scale tax cut without funding measures, sending shockwaves through not only the UK bond market but also the broader bond markets of major developed countries.

Nikkei described "the instability in the government bond market and the economic crisis triggered by the Strait of Hormuz as sounding an alarm for the Japanese economy, hidden beneath the stock market boom," likening it to the "boiling frog syndrome"—an expression referring to a situation where one fails to respond promptly to changes in the environment, like a frog slowly heating up in water. The newspaper further criticized, "Prime Minister Sanae Takaichi's cabinet is relying on symptomatic remedies—such as releasing oil reserves and providing subsidies in response to high oil prices, or intervening in the foreign exchange market by buying yen and selling dollars instead of raising interest rates to address the weak yen—rather than implementing fundamental solutions."

It was also pointed out that at the beginning of May, just before the long holiday, the Japanese government and Bank of Japan bought about 5 trillion yen (approximately 4.63 trillion won) worth of yen, and intervened in the market three more times during the holiday period. However, the government has not released an official statement regarding its market interventions over the holiday.

Nikkei expressed concern that "if investors perceive that the Takaichi administration is intervening in the currency market to secure funds for a supplementary budget or for a reduction in the food consumption tax, the government's foreign exchange intervention itself could trigger speculative selling of both the yen and Japanese government bonds." Japan's benchmark 10-year government bond yield exceeded 2.53% on May 1 and hovered around 2.52% as of May 11.

Meanwhile, on May 12, U.S. Treasury Secretary Scott Bessent is scheduled to visit Japan and hold consecutive meetings with Prime Minister Sanae Takaichi, Finance Minister Satsuki Katayama, and Bank of Japan Governor Kazuo Ueda, where discussions are expected to focus on bilateral cooperation to defend the value of the yen.