Why Investors Everywhere Should Watch Japan’s Bond Market
Japan’s position as the land of rising bond yields merits close attention
Japan’s position as the land of rising bond yields merits close attention
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An electronic stock board displaying the yield for 10-year government bond outside a securities firm in Tokyo in June. In less than a week, 10-year Japanese government bond yields have surged. PHOTO: BLOOMBERG NEWS
By Richard Barley
Aug. 2, 2016 8:40 a.m. ET
Reminder: bond yields can rise as well as fall. A glance at Japan should give investors who have reveled in this year’s bond rally pause. More testing times could lie ahead.
In less than a week, 10-year Japanese government bond yields have surged higher. Last Wednesday, they stood at minus 0.29%; on Tuesday, they closed at minus 0.07%, having come close to zero, as a poorly-received auction added to the disappointment following the Bank of Japan’s failure last week to deliver a monetary big bang.
The move could yet be contained to Japan; the bond market there is dominated by domestic players and tends to move to the beat of its own drum. So far, U.S. Treasurys and German bunds haven’t moved in a similarly violent way, although yields have risen modestly. In Europe in particular, the effect of European Central Bank bond purchases is likely weighing on long-dated bond yields; that in turn may help keep a cap on U.S. yields, with Germany acting as an anchor. But rising Japanese yields could yet make foreign bonds less attractive to Japanese investors, removing a support.
 A clash of forces is building, however, as questions arise about whether monetary policy makers are running short of options; increasingly, markets have been underwhelmed by the outcome of central bank decisions. This week’s Bank of England meeting could be telling; while Brexit is a local economic shock, not a global one, the central bank’s response will have wider resonance in showing how much room for maneuver policy makers have.
Moreover, a debate about making greater use of fiscal policy is gathering steam. That would be bearish for bonds. Japan’s new ¥28 trillion ($274 billion) stimulus package, approved by cabinet Tuesday, is a case in point, although it isn’t seen as a game-changer for the country’s economy—nor likely for bond yields, as details of the plan had leaked before yields started moving.
At the same time, jitters persist about the global economy. Oil prices entered a bear market Monday, and central bankers may be worrying about continued low inflation. That would require a further policy response, the expectation of which would at least initially support bond prices.
The problem is that the bond market is already deep into uncharted territory, with negative yields abounding and some governments being paid outright to borrow. Even those investors who have called the market right so far can’t afford to feel comfortable in this environment.
Write to Richard Barley at richard.barley@wsj.com
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