Charts of the week: German geopolitics, Japan’s bond investors, undervalued currencies
This week’s charts cover the following data:
Geopolitical risk perceptions depend on where you are sitting
In Germany, Russia’s war on Ukraine is perceived as the riskiest geopolitical crisis in 40 years. Americans are concerned, but Stateside, nothing compares to 9/11.
This chart uses measures of risk from Economic Policy Uncertainty, an academic group that measures news coverage to create indices relating to challenges ranging from infectious diseases to wars.
We used their data a year ago, after?Russia invaded Ukraine. This is a different visualisation, which tracks a global geopolitical risk index against the perception of risk in nine major countries.
The “pulses,” or bubble size, reflect a deviation from the mean, i.e. the greater salience of geopolitical risk at a given moment.
Germany is notable for how much its perception of risk surged. Europe’s biggest economy lost the source of energy that was key to its economic model and has had to pledge a military revamp as full-scale land wars return to the continent, not too far east of Germany’s borders.
The Japanese are selling their foreign bond holdings
Japanese investors bought enormous quantities of foreign bonds over the last twenty years, seeking yield wherever they could find it. That trend has reversed.
During the period of very low – and sometimes negative – interest rates in Japan, the nation’s investors sought out the much steeper yield curves abroad. (Japan’s companies are also famously cash-rich, and had a limited need to issue corporate bonds.)
Key to this investing strategy was the ability to inexpensively hedge currency risk. Hedging is now more expensive (and local yields are higher) amid speculation that the?Japanese central bank will abandon its yield control policy?and let rates rise.
The bottom panel of our chart shows how Japanese investors have been reducing foreign government and corporate bond holdings for about half a year. The top panel of our chart shows the net position on a global basis; as the chart is in negative territory, the rest of the world now holds more Japanese debt than vice versa.
Real Effective Exchange Rates
This Real Effective Exchange Rate (REER) is a weighted average of a country’s currency in relation to other major currencies, using weighting based on trade balances. When it rises, it means a country is losing trade competitiveness.
This chart shows nations’ deviation from their long-term average and five-year average REER to give a sense of which nations are benefiting from a devalued currency – Colombia and Turkey among them – or are suffering from an arguably overvalued one, as seems to be the case for the Czech Republic.
On the right-hand side, the size of the bubbles reflect the impact on imports and exports.
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Macrobond News
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Macrobond webinar - China’s great reopening: assessing the prospects for Asia’s growth engine
Are we on the cusp of a boom in tourism and trade as pent-up Chinese demand is unleashed? What is the outlook for economies intertwined with China, from Australia to Germany?
Our speakers examined whether Asia's biggest economy is likely to resume its role as the global growth engine – or whether headwinds like a deflating property bubble will weigh heavily on China and its trading partners.
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