What's going on?

After spending trillions of dollars on limiting coronavirus�s economic impact, the US and Europe might find they have a lot more in common with Japan than they realized.

What does this mean?

The Bank of Japan (BoJ) has spent the last couple of decades buying up government bonds in an effort to boost both the country�s inflation and its economic growth prospects � all without much success. And those continued purchases mean the Japanese debt owned by the BoJ is now larger than the current size of the country�s entire economy.

Investors, then, might be getting d�j� vu. There are record low interest rates in Europe and the US at the moment, and both countries have announced unprecedented amounts of mid-pandemic spending to support their economies. Europe�s central bank now owns eurozone debt totaling 40% of its economy�s size, and America�s owns about 30%. And with more spending likely � and an economic bounceback less so � the two of them might soon be in the same tight spot as their Eastern cousin.

Why should I care?

For markets: You snooze, you lose.
Having continued to buy bonds without successfully stimulating its economy, the BoJ now owns about half the country�s total � making buying and selling them a less exciting prospect for investors. The risk is that the same thing happens to the US’s bonds: with its central bank ready to buy unlimited amounts, bonds’ volatility (i.e. their swings in prices) has already dropped to a one-year low. And as corporate bailouts arrive with tough terms and government-owned stakes, that decline in investor interest could plague stock markets too.

The bigger picture: Banks at the ready.
If central banks stop buying massive amounts of government bonds, the drop in demand is likely to send their prices down and yields up (the two move inversely), in turn increasing borrowing costs for everyone else. And if that discourages spending, economic growth could falter � and central banks may need to step in again.