The Big Whale: There's been a lot of talk about Japan in recent days, particularly with a sharp rise in its bond yields. What is the current situation there?
Alexandre Baradez: Japan is in a truly unique situation. For years, the Bank of Japan (BoJ) has absorbed a massive proportion of the sovereign debt issued by the government, which has enabled it to maintain extremely low or even negative interest rates. On several occasions, such as in 2016 and 2019, the 10-year rate fell as low as -0.28%, reflecting both very low inflation and sluggish growth, with little wage pressure. After the Covid crisis, the BoJ tried to keep control of the yield curve through 'Yield Curve Control', capping long rates at 0.5%, for example. To maintain this limit, it had to buy a lot of bonds. But in the face of inflation that eventually settled at around 3.6% - higher than in Europe - and stronger wage growth, it was forced to relax this control. As a result, the 10-year yield is now close to 1.6%, the highest since 2008, and 20- and 30-year yields are at record levels. It's a genuine normalisation, but one that is upsetting a system that has long been used to monetary anaesthesia.
And yet, rates in Japan remain well below those in the United States. Why are we talking about specific pressure on Japanese rates?
Because Japan was starting from a very low point. Above all, the shock came not so much from the absolute level as from the paradigm shift. Japan was an island of deflationary stability for three decades, with ultra-accommodating monetary policies. Now, however, it has been overtaken by sustained inflation, wage rises and a desire on the part of the BoJ to reduce its interventions. It has drastically reduced its bond purchases, forcing banks, insurers, pension funds and foreign investors to take up the slack. And that's something the market is finding hard to absorb, especially as Japan remains highly indebted - over 200% of GDP - raising doubts about long-term fiscal sustainability.
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You also mention a global impact. How is Japan's normalisation destabilising global markets?
It has to do with the famous "carry trade". For years, investors borrowed at very low rates in Japan - where money cost nothing - to invest in higher-yielding assets elsewhere, notably US Treasuries. But as soon as Japanese rates rise, even just a little, this interest rate differential shrinks. This makes this type of arbitrage less attractive, and some people unwind their positions. This is exactly what happened last summer: the BoJ unexpectedly raised its head, the Nikkei plunged 30%, and global markets were rocked. The VIX - the fear index - temporarily soared. Today, tensions are less brutal, but doubts persist.
"Long rates remain very high, without this being justified by short-term economic fundamentals" The United States has also been affected. Last week we saw a failed auction...
Yes. A few days ago, the US Treasury issued 20-year bonds, and the bid-to-cover - which measures the ratio between demand and supply - was significantly lower than usual. This is not dramatic in itself, but it is a signal that appetite for US debt is waning, and not just for technical reasons. It has to be seen in a broader context: a creeping trade war, a very costly tax plan by Trump that would further increase public debt, and a Fed that is, for the time being, standing still on interest rates. As a result, long rates remain very high, without any justification in terms of short-term economic fundamentals, notably slowing inflation.
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Can we talk about the start of a "bond crisis"?
Not yet, but we have seen some abnormal market movements. For example, in early April, when Trump announced his taxes, 10-year yields jumped 60 basis points in a few days. This was not a crash in the traditional sense, but it was a clear sign of stress. The VIX has risen to 60, which is rare. And the most important thing is that this kind of movement can have very tangible effects: mortgage rates are indexed to long-term rates, so pressure on Treasuries has a direct impact on housing and consumption in the United States. If employment were to deteriorate, this would be a trigger for a new phase of stress.
And precisely what would it take for rates to ease again?
The US situation needs to become clear again. If Trump succeeds in signing agreements with China and Europe, this will calm the markets. The Fed will then be able to intervene by cutting rates, probably from September onwards. But beware: if rates are cut because the economy is slipping and employment plummets, this will not be good news for the markets.
Can stablecoins play a role in this context?
Absolutely. Stablecoin issuers have become massive buyers of US debt. With high interest rates, this is even a very favourable time for them: they are placing reserves in Treasuries, which pay good interest, while at the same time issuing back-to-back digital currency. The United States has understood this: it is a tool of sovereignty. The more stablecoins there are in dollars, the more indirect buyers there are of US debt. This raises the question of how Europe can develop credible alternatives. Launching stablecoins in euros, backed by European debt, would be an excellent initiative, both economically and strategically.
"Stablecoins would strengthen the use of the euro in international payments, but would also create a new source of demand for European debt" Fairly, Europe seems to be enjoying renewed interest. How do you explain this?
There has been a real rotation of flows in favour of Europe since the start of the year. International investors - sometimes even American - are rebalancing their portfolios. Despite moderate growth, Europe is perceived as a zone of stability. The ECB has lowered interest rates, without crushing them, which creates an interesting balance: accessible financing, attractive rates for investors, falling inflation... It's a good time to launch financial innovations such as stablecoins in euros or pooled debt issues. We need to take advantage of this favourable wind.
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You say it's a good time to launch euro stablecoins. How can these instruments strengthen European monetary sovereignty in the current context?
Euro stablecoins could play a major strategic role for Europe. Today, we can see that issuers of stablecoins in dollars, such as Circle or Tether, have become massive buyers of US debt. It's a virtuous circle for the United States: the greater the demand for stablecoins, the more digital dollars it issues backed by Treasury bonds, which supports its bond market and reinforces the hegemony of the dollar. Europe, on the other hand, has not yet made the switch. Yet it is currently benefiting from an influx of capital, a perception of stability and increased demand for its assets, including its debt. This makes it an ideal window of opportunity to develop euro stablecoins. Not only would this strengthen the use of the euro in international payments, it would also create a new source of demand for European debt. This would be a lever for monetary and financial sovereignty that Europe would do well to activate without delay.
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A word about the euro, in fact. Is its rise against the dollar a problem?
For European exporters, yes. Gaining 15% on the dollar in the space of a few months is no mean feat. But we need to distinguish between "default" purchases - selling the dollar out of fear of the US economy - and "buy-in" purchases. What we are seeing at the moment is a mixture of the two: investors also want exposure to the eurozone, which supports the euro. As long as we stay in a zone between 1 and 1.20 dollars, it's not a disaster for European manufacturers. We're still within acceptable levels.
What about Bitcoin?
It has played its role as a safe-haven asset during episodes of stress, but it remains highly correlated with the Nasdaq. We saw a nice surge towards $110,000, but I think it could come back towards $90,000 or even a little below that before eventually breaking out again. The key is for the Fed to cut interest rates, for trade uncertainties to end and for equities to ease. If all that aligns, then yes, we could aim for $130,000 or $150,000. But for the time being, the market is still a little too euphoric. A technical pullback would be healthy, and would even be a good buying opportunity for medium-term investors.
Why do you think tech stocks could fall further? Because valuations have become demanding again in what remains an uncertain environment. The Nasdaq, for example, has risen to more than 21 times earnings, which is high by historical standards, especially with long-term rates still above 4.5%. It seems the market is already pricing in an ideal sequence: disinflation, falling rates, return to growth... However, this trajectory is far from certain. As long as economic prospects, particularly regarding consumption and employment, aren't clearer, these multiples seem difficult to justify. A period of pullback or consolidation would therefore be healthy before potentially moving higher again.
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