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Japanese government bonds yields are at multiyear highs. The five-year bond yields have been pushed to the highest since 2013. The 10-year equivalent reached 0.8% for the first time in a decade. The swap rates used to hedge against or bet on bond yield shifts have also surged. It is also noteworthy that debt yields in the US are rising at a faster pace in Japan, stoking concern that investors could look for higher rates to retain their money in Japanese bonds.
Today, the Bank of Japan conducted an unscheduled bond purchase where it offered to purchase 675 bn Yen ($4.52 bn) worth of bonds with maturities between 5 and 10 years. This is more than at their previous operations. However, it failed to ease government bond yields off decade-peaks.
Will the BOJ exit its ultra-lose monetary policy?
The rise in government bond yields is causing immense pressure on the Bank of Japan (BOJ) to raise its yield-curve cap and put an end to its negative interest-rate policy. Bank of Japan Governor Kazuo Ueda summarised the outcome of the BOJ’s September meeting and said there was still a long way to go before the exit from ultra-loose monetary policy. He didn’t rule out ending the ultra-loose policy, however, he emphasised a “more appropriate” timing. The summary indicated that the BOJ is slowly preparing to end the negative interest rates.
However, several researchers have cautioned that the BOJ’s exit from ultra-loose policy would be difficult due to its massive balance sheet. It could expose itself to major losses that could raise questions about its credibility.
Moreover, Ueda also said the BOJ will consider an exit when it can sustainably achieve 2% inflation. In September, consumer prices excluding fresh food climbed 2.5%, compared to 2.8% in August, supporting the central bank’s strategy to retain its current stance. In the BOJ September meeting summary, one of the members stated that the achievement of the BOJ’s 2% inflation target seems to have “clearly come in sight.”
As per the summary, the bank could be able to decide if the target will be met around January to March 2024. “This new inflationary era is creating investment opportunities among Japanese firms that can expand their profit margins,” stated Fidelity International. “While accelerating inflation has been a big headache for the West over the last two years, it’s a good problem to have for Japan, at least for now.”
Yen continues to decline, helping Japan’s economy
Meanwhile, the yen depreciated past 150 to the dollar on Tuesday but strengthened immediately after to 147.3, fanning speculation that the Japanese authorities have intervened to arrest the free fall of the currency. However, finance minister Shunichi Suzuki rejected speculation that Tokyo had intervened. “We’re ready to take necessary action against excess volatility, without ruling out any options,” he told reporters.
On Wednesday, the yen weakened again, hovering at around 149 midday.
As per experts, the weak yen has been helping the Japanese economy so far. Bank of Japan’s latest quarterly Tankan survey revealed that the weak yen has improved business sentiment at Japanese companies. The Daiwa Institute of Research estimates that if the yen declines 10% from the 130.50 level seen in January, the real gross domestic product could rise by 0.1%.
Also, according to a latest report by CBRE Japan’s property sector saw a 45% year-on-year rise in foreign investments in the first half of 2023, helped by the weak yen and the ultra-loose monetary policy.
