A looming policy change by the Bank of Japan is already pushing Australian bond yields higher

Hannelore Foerster/Getty ImagesBank of Japan Governor Haruhiko Kuroda resembles an orchestra conductor as he discusses monetary policy at a panel in Germany.
  • Indications from the Bank of Japan that it’s considering tweaking monetary policy has given rise to material moves in global bond yields.
  • ANZ rates strategist Martin Whetton said “there might well be implications” for Australia’s bond market.

  • Analysts will be closely watching global bond markets this week, following reports the Bank of Japan (BoJ) may be considering changes to its monetary policy settings.

    Sources told Reuters that BoJ committee members are holding discussions on whether changes are required to the bank’s hugely accomodative stimulus measures, in order to make them more sustainable.

    The reports gave rise to a sharp move in US 10-year bond yields on Friday night, which rose by six basis points to 2.89% — the biggest move in around two months.

    Yields on Japanese 10-year government bonds also rose by six basis points this morning to 0.09%.

    The Bank of Japan conducts monetary policy so as to keep the yield on 10-year bonds pinned near zero, so in that context the increase is significant.

    ANZ senior rates strategist Martin Whetton told Business Insider both moves could be “almost exclusively” attributed to the BoJ reports.

    In addition, Australian government bond yields are higher across the curve, with 10-year yields rising four basis points to 2.67%.

    For Australia’s bond market, “there might well be implications” from a change in BoJ policy, Whetton said.

    Any fallout domestically can largely be tied back to large Japanese life insurance companies.

    Due to extreme stimulus measures adopted by the BoJ, the rates of return on bond investments in Japan are low. So the big Japanese “lifers” look offshore to build out their portfolios.

    And they have a preference for investing some of their huge cash piles in rates products denominated in Australia dollars.

    Whetton said Japanese money accounts for “between a quarter and a third” of overall demand for AUD-denominated bond market investments.

    And that demand “rises sharply” for longer-dated 10-year bonds, which is where Japanese investors direct the majority of their funds.

    In addition, Whetton said the bulk of Japanese investment in the AUD rates market “is typically held un-hedged overall — nothing from the life insurance companies and a smaller percentage from fund managers”.

    Such a scenario makes it easy for big Japanese capital flows to shift back onshore, in the event that the BoJ tightens policy and the rate of return on Japanese government bonds becomes more attractive.

    For Australian-based bond issuers, “this makes it harder to get longer-dated AUD funding away”, Whetton said.

    In the end though, Whetton said AUD-denominated investment products will still remain profitable for Japanese companies, which means “the demand will never really go away”.

    “The Japanese lifers make a lot of money offering these products in AUD. It would be a curious — and less profitable — business decision to not offer them,” Whetton told BI.

    Either way, the latest developments are “something to watch and be aware of”, he said.

    While the US Fed has commenced on its tightening cycle and the European Central Bank is now eyeing the withdrawal of monetary stimulus, the BoJ has consistently indicated to the market that it will keep the taps flowing as part of efforts to boost inflation.

    So in that context, the prospect of changes to BoJ policy would represent a notable shift in the composition of global bond markets.

    The BoJ holds its next policy meeting on Monday July 30.

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