A Wake-Up Call From Japan
Central banks are withdrawing from ultra-loose monetary policy as gradually as possible, but volatility is still inevitable
By
Richard Barley
Aug. 1, 2018 7:49 a.m. ET
What happens when you wake a market from deep slumber? Japan is the latest place investors should watch.
For a long time, central banks have helped to tamp down swings in markets via ultraloose monetary policy, boosting risk appetite. But things are changing, even in the spiritual home of low interest rates.
The Japanese 10-year bond yield jumped to 0.13% on Wednesday, a day after the Bank of Japan’s latest policy decision. That’s the highest since January 2016, when the BoJ introduced negative interest rates. The one-day jump in yields of 0.08 percentage point, which followed a decline of 0.05 percentage point Tuesday, is huge in a market where bond prices have moved only fractionally for months, thanks to the BoJ’s policy of pinning yields close to zero. This could mark a regime change for markets, argue strategists at Mizuho.
Two clashing policy tweaks are at work. The BoJ Tuesday introduced forward guidance that monetary policy would stay loose. Central banks have come increasingly to rely on this tool for smoothing market expectations and hence reducing volatility. But the BoJ also said it would allow 10-year yields to move in a wider range—up to 0.2%, said Governor Haruhiko Kuroda. Markets are starting to test that new range.
The potential for bigger moves in yields is a risk for investors and a boon for traders. Investors will require a higher risk premium to hold bonds, contributing to somewhat higher yields. That could spill over into other markets where Japanese investors have flocked to put cash to work in the face of zero yields at home.
The BoJ isn’t going anywhere fast. But the big picture is one where central banks globally are pulling back gradually from years of deep involvement in markets. Snoozing through that process isn’t an option.
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Bank of Japan Shift Propels Biggest Bond-Yield Jump in Two YearsRise comes one day after central bank widened trading band; ‘it’s not reflecting fundamentals or anything’
The minute policy changed announced by Bank of Japan Gov. Haruhiko Kuroda Tuesday made a large impact on the bond market Wednesday.PHOTO: TORU HANAI/REUTErs
By
Kosaku Narioka
Aug. 1, 2018 6:41 a.m. ET
TOKYO—The yield on the benchmark Japanese government bond posted its biggest percentage-point gain in two years, a day after Bank of Japan Gov. Haruhiko Kuroda said he would allow the yield to move in a wider band.
On Tuesday, Mr. Kuroda raised the BOJ’s yield cap on the 10-year Japanese government bond to 0.2% from around 0.1%. The central bank, which buys the equivalent of hundreds of billions of dollars in Japanese government bonds every year, has enforced the cap through market operations since it introduced a target of “around zero” for the bond’s yield in September 2016.
Highlighting how the bond market has become captive to central-bank policy, the yield on Wednesday quickly shot above the former cap and in afternoon trading reached 0.12%, the highest level since Feb. 3, 2017.
“It’s not reflecting fundamentals or anything,” said Chotaro Morita, head of Japan rates strategy at SMBC Nikko Securities. The market responded to the BOJ, he said, not to any change in perceptions of the economy.
The day’s gain of 0.06 percentage point was the biggest since one of 0.085 percentage point on Aug. 2, 2016, according to data provider Quick.
Prices for Japanese government bond futures fell sharply, prompting emergency margin calls from the main security-clearing house. A Japan Securities Clearing Corp. official said a few financial institutions were asked to post additional collateral.
The central bank’s big bond purchases have lowered borrowing costs for companies and consumers, but some worry they hollow out the bond market’s functions and suppress a useful signal about the state of the economy and government finances.
Market players are watching whether the yield will reach the 0.2% cap, and if so how quickly. Mr. Morita of SMBC Nikko said the BOJ might step in to tame the rise if it sees the movement as too rapid.
Takahide Kiuchi, a former BOJ policy-board member, said he views the new range as risky and warned that the central bank may not be able to enforce it if the market turns volatile. “There is the possibility that the BOJ cannot protect the ceiling,” he said.
Write to Kosaku Narioka at kosaku.narioka@wsj.com |
