Government 10-year bond Yield in Japan Exceeds New High
TOKYO— Less than a month ago, as pressure to tighten policy increases, the yield on the standard 10-year Japanese government bonds crossed the 0.5% threshold established by the Bank of Japan 8301 0.00% increase; bluish green pointing triangle. Investors are speculating that the BOJ may follow the Federal Reserve as well as other central banks in unraveling its easing program by raising the limit once again or possibly abandoning its yield-curve management strategy completely in light of this week’s strong inflation statistics. On Friday in Asia, the 10-year JGB yield momentarily increased to 0.545%. The BOJ purchased the most bonds in a single day in history on Friday, purchasing 5 trillion yen ($39 billion) worth of JGBs with maturity ranging from one to twenty-five years to halt the surge. That happened after it purchased JGBs for 4.6 trillion on Thursday. In the late hours of the Asian trading day, the yield was 0.505%.
Additionally, the yen gained ground on Friday, hitting a high versus the dollar of more than seven months. The market now anticipates that the U.S.-Japan interest rate differential, which was mostly responsible for the yen’s weakening last year, won’t widen considerably this year as a result of slowing U.S. inflation. By the end of the Asian day, the exchange rate was 128.73 to the dollar. The central bank shocked the markets on December 20 by allowing the 10-year rate to increase to 0.5%, over the prior cap of 0.25%. Most central bank watchers disagree with BOJ Governor Haruhiko Kuroda, who has stated numerous times that the new ceiling does not herald the beginning of a cycle of monetary tightening.
Naomi Muguruma, a strategist at Mitsubishi UFJ Morgan Stanley Securities, said that once a new BOJ governor is appointed, in the April–June quarter, the BOJ will abandon the 10-year objective while maintaining its minus 0.1% aim for short-term interest rates. But she said that if market turbulence persists, the BOJ may be obliged to intervene the following week. The policy board of the bank will meet for two days, concluding on Wednesday, to establish policy.
According to Ms. Muguruma, if the BOJ attempts to quell the rise in the yield on 10-year JGBs, investors may rush to other JGB maturities, dramatically raising rates in those sectors and adding to yield curve distortions. Because JGB rates are regarded as a price benchmark, this may ultimately make it more challenging for firms to issue bonds. Because the BOJ is coming closer to its objective of starting to see both wages and prices increase, Ms. Muguruma continued, the market is beginning to anticipate an end to the central bank’s influence over the yield curve.
Core inflation increased by 4% in December, the greatest rate of rise in almost 41 years, according to inflation figures released on a Tuesday in Jan, 23, again for Tokyo metropolitan region, which is considered to be an early sign of national pricing trends. Fresh food costs are excluded from core inflation. Some businesses have already declared rises ahead of the yearly pay discussions in the spring. The company that owns Uniqlo apparel stores, Fast Retailing Co., announced this week that it intended to raise yearly compensation by as much as 40%. Takeshi Okazaki, the chief financial officer of Fast Retailing, said at a press conference on Thursday, “We believed we should pay salary that matches international standards if we want our staff to deliver world-class work.”
According to BOJ policymakers, stable wage growth is essential to transforming the present inflation into a more long-lasting pattern supported by robust demand. Increasing energy and food prices have been the major causes of inflation in Japan. To prevent rates from increasing too quickly, Citi strategist Tomohisa Fujiki predicted that the BOJ will abandon its yield-curve management and announce greater JGB purchases the following week. “Short covering by traders may drive JGB yields down as well as yield-curve management is totally withdrawn,” Mr. Fujiki said.
Bank of Japan Maintains Interest-Rate Targets Despite Pressure
TOKYO— Despite considerable investor pressure on the bank’s new 0.5% restriction for the yield on 10-year government bonds, the Bank of Japan maintained its interest-rate goals intact on Wednesday. The 10-year Japanese sovereign debt yield objective was set by the Japanese central bank to be near zero, while short-term interest rates would remain at minus 0.1%. The bank restated its intention to set a 0.5% yield restriction. On Dec. 20, the BOJ unexpectedly raised the limit from its prior maximum of 0.25% to 0.5%. Investors interpreted the action as a hint that the bank was following the Federal Reserve and other central banks in raising interest rates, despite Gov. Haruhiko Kuroda’s assertion that it wasn’t the start of a cycle of monetary tightening. At its two-day session that ended on Wednesday, the BOJ was expected to raise the cap once more or potentially do away with it completely, terminating the yield curve management strategy that has been in place since 2016.
Nevertheless, the BOJ did not significantly alter its position from December. Additionally, it chose to maintain brief interest rates at -0.1%. Prior to the decision, the yen was trading at roughly 128.50 to the dollar. On Wednesday afternoon in Tokyo, it was trading among 130 and 131 to the dollar. Inflation in Japan, which had previously undergone decades of deflation, has now begun to speed up due to increasing energy and food prices. Consumer price inflation is getting close to 4%, and some major corporations have announced they want to raise wages significantly this year.
This same 10-year Japanese government return exceeded the 0.5% ceiling last week, reflecting anticipation for a shift in Bank of Japan policy. The bank set a record for a month by purchasing over 17 trillion ($132 billion) worth of government bonds in order to protect the quota. Following the ruling on Wednesday, the 10-year yield decreased to 0.41% in afternoon trade. Analysts predicted that the market will most likely test the 0.5% cap once more. The responsibility of changing policy may fall to Mr. Kuroda’s successor as he is only expected to preside over one more policy meeting before his tenure ends in April, according to Michiyoshi Kato, director of fixed-income sales at Mizuho Securities.
The BOJ predicts that soon inflation will be below its 2% objective. The BOJ’s policy board predicted that core consumer prices, removing volatile fresh food prices, would rise 1.6% in the year ending In march 2024 and 1.8% in the following year in its quarterly forecast, which was announced on Wednesday. Recently, energy costs have decreased, as well as the yen has slightly recovered since last October, when it hit a 32-year low. As a result, import costs are cheaper in yen terms. What were supposed to be the last months of Mr. Kuroda’s decade-long tenure have been completely turned around by the conflict between both the BOJ and the markets. Throughout his tenure in power, he has focused on maintaining interest rates as low as possible, and to that end, the BOJ has spent hundreds of trillions of dollars buying Japanese government bonds.
The Bank of Japan stated once more on Wednesday that it “will proceed with large-scale JGB purchases.” The Bank of Japan had owned somewhat more than 50% of all existing government bonds as of late September. The country owes the most of its debt to itself since the central bank is a component of the government. The BOJ has no chance of running out of funds. The yen required to pay banking sector for the securities they are selling is simply created by the central bank. The purchases do, however, cause certain oddities in the bonds. In comparison to other rates, such as the 1.385% return on the 20-year bond as of a Wednesday in Jan, 23, the 0.5% return on the 10-year bond, which is the only one that the Bank of Japan has specifically targeted, appears unnaturally low. Officials and analysts warn that this might upset companies that issue corporate bonds and use government bond rates as a benchmark.
