This past weekend, Japanese voters overwhelmingly endorsed prime minister Junichiro Koizumi’s plan to privatize the Japanese postal system. What, you may rightly ask, does mailing a letter in Japan have to do with buying a house in San Diego? To which I answer: potentially quite a bit.
Japan Post, you see, is more than just a post office. It is a massively subsidized behemoth that, in addition to delivering mail, offers insurance and banking services to all of Japan. It is, as a matter of fact, the biggest financial institution in the world, and it controls over $3 trillion in financial assets.
Here’s how this relates to housing. You’ll recall from prior articles on the bond market that US mortgage rates are heavily influenced by the Japanese in two ways:
- Incredibly low rates on Japanese government bonds (JGBs) induce Japanese savers to buy and hold US bonds.
- The “soft peg” between the dollar and the yen is largely maintained through the Japanese central bank’s buying and holding of US bonds.
Both factors increase the demand for US bonds, thus increasing bond prices and lowering rates. And thanks to the election this weekend, both factors may be changing.
Let’s start with Factor #1. Japan Post owns over 50% of outstanding JGBs, many of which will be sold as part of the privatization process. The market for JGBs will suffer a double whammy as its biggest customer stops buying, and furthermore starts selling off its huge cache of JGBs (some economists estimate that Japan Post will sell as many as $2 trillion worth). This increased supply and decreased demand will almost certainly lower JGB prices, thus raising their yields and possibly enticing Japanese holders of US bonds to switch back to the home team. US bonds would be sold off, and US mortgage rates would rise accordingly.
Factor #2 is further from the crosshairs than Factor #1, but is in danger nonetheless. The reform-happy Koizumi has just been handed a landslide victory, and he is likely to use that momentum to pursue further reforms. Japan’s policy of purposely weakening its currency in order to prop up the export industry could very well come under fire, leading to reduced buying and even some selling of Japan’s massive hoard of US Treasuries.
Away from the voting booths, Japan’s economy seems finally to be climbing out of its long period of stagnation, most recently registering a 3.3% annualized GDP growth rate. A stronger Japanese economy will both exert further upward pressure on JGB yields and lessen the dependence on exports that has induced the Japanese central bank to weaken the Yen by buying so many US bonds. In other words, good news for the Japanese economy is bad news for US borrowers.
I’m not suggesting that any of this will have an immediate effect. Japan’s positive economic developments and sweeping reforms may eventually exert significant upward pressure on US mortgage rates, but this macroeconomic shift will likely take many years to play out entirely. It’s nonetheless important to realize that one more slat has been removed from the financial Jenga game that is the San Diego housing market.