The eyes of the financial world are suddenly back on Japan

  • Benchmark 10-year Japanese Government Bond (JGB) yields have spiked to the highest level in six months.
  • Reports the Bank of Japan (BoJ) may be about to alter its bond-buying program have been behind the move, resulting in a sharply stronger Japanese yen and losses in Japanese stocks.
  • The BoJ will announce its July monetary policy decision on July 31.

Japanese government bond (JGB) yields are on the move, lifting to the highest level in six months in early trade on Monday.

The yield on benchmark 10-year JGB yields currently sits at 0.075%, well above the 0.036% level where it closed Friday’s trading session.

It briefly spiked above 0.09% earlier in the session, the highest level since early February.

JGB 10-Year Yield Daily Chart.

While four basis points doesn’t seem like much, particularly compared to those seen in other sovereign bond markets, for Japan, and the world, this is a significant move.

Rather than a shift in inflation expectations or the perceived creditworthiness of the Japanese government, the spike has been caused by speculation the Bank of Japan (BoJ) may be about to alter its giant bond buying program, known as quantitative and qualitative easing (QQE).

According to Reuters, citing unnamed sources, there have been “unusually active discussions before this month’s policy decision, with changes to its interest-rate targets and stock-buying techniques on the table”.

The sources told Reuters the BOJ could tweak its yield-curve control (YCC) program — designed to anchor 10-year JGB yields at around 0% through large-scale bond purchases — to “allow for a more natural rise in long-term interest rates to ease the pain on banks from years of near-zero rates”.

In recent years, the BoJ has pledged to buy around 80 trillion yen in JGBs per annum in order to keep benchmark yields stable at around 0%. However, over the past year, BoJ purchases have been well below this level, increasing speculation the BoJ may abandon its nominal annual purchase target altogether.

Reuters said other ideas include operational changes to the way the BoJ buys government bonds and exchange-traded funds (ETFs), acknowledging concerns expressed by some market participants that the bank’s huge purchases are drying up market liquidity and distorting price movements.

The BoJ has been purchasing six trillion yen ($US54 billion) worth of ETFs per year for several years, reducing market liquidity and putting the bank on track to become a top shareholder of many big Japanese companies.

Even with large-scale purchases of bonds and stocks, Japanese inflationary pressures remain close to non-existent, rising by just 0.2% in the year to June when fresh food and energy price movements were excluded, well below the 2% level targeted by the BoJ.

The sources told Reuters that discussion among policymakers are preliminary with any tweaks dependent on new inflation forecasts that will be offered when the BoJ meets early next week.

When last released in April, the BoJ forecast core CPI increasing to 1.3% by March 2019, and 1.8% by the end of fiscal year 2020, both below its 2% target.

At its previous meeting held in June, the bank downgraded its assessment on inflation, describing it as “in a range of 0.5 to 1%”. It previously said it was moving “at around 1%,” adding to speculation it will cut its forecasts at its July 30-31 meeting.

“If it turns out it would take too long to hit 2% inflation, there could be discussions on a policy change,” one source told Reuters.

“The BoJ could consider steps to make its policy more sustainable if structural factors are behind weak inflation,” another source said, telling Reuters that the cost of prolonged easing is becoming “hard to ignore”.

Along with sending ripples across Japan’s yield curve, speculation over a potential change in BoJ asset purchases has also impacted the Japanese yen, seeing it strengthen modestly over the past two sessions.

USD/JPY Daily Chart.

The Nikkei 225 stock index in Tokyo is also coming under pressure, currently sitting down more than 1% for the session.

Nikkei 225 Daily Chart.

The gyrations in Japanese financial markets are also spilling over the broader Asian region with most major stock indexes sitting in the red. Government bond yields are also higher while the US dollar is trading lower.

There’s more at Reuters here.