Nikkei Drops Fast After Bank Of Japan Minutes

After Nikkei futures rose as high as 13,225 earlier (up 6.3% from Thursday’s close), they have taken a sharp turn lower following the release of the minutes from the Bank of Japan’s May 21-22 policy meeting.

Right now, the Nikkei is trading around 13,040, up *only* 4.8%.

nikkei futures

Part of the minutes focuses on the volatility in the Japanese government bond market that has spilled into equity and currency markets as well in recent weeks.

Here are the key paragraphs from the minutes:

Members next discussed developments in the bond market. They agreed that the
recent rise in long-term interest rates in Japan was attributable to such factors as the
increase in U.S. and European long-term interest rates, the rise in Japanese stock prices, and
the further depreciation of the yen. A few members noted that, reflecting speculation that
the Federal Reserve would reduce the pace of its asset purchases earlier than expected, the
responsiveness of U.S. long-term interest rates to economic indicators was increasing, and
therefore due attention should be paid to how these developments would affect Japan’s
long-term interest rates. On this basis, members shared the recognition that the Bank’s
massive JGB purchases, through the reduction in risk premia, were restraining upward
pressure on interest rates that stemmed from an improvement in perceived business
conditions and a pick-up in expected inflation rates. Some members added that the effects
of compressing risk premia were likely to strengthen as the Bank proceeded with JGB
purchases, and therefore it was difficult to expect a surge in long-term interest rates for the
time being. Meanwhile, many members pointed out that, if the bond market remained 

highly volatile, this could increase the amount of interest rate risk incurred by banks and
other financial institutions, thereby further boosting sales of JGBs. These members then
expressed the opinion that it was appropriate for the Bank to make various operational
adjustments, with a view to encouraging the stable formation of long-term interest rates by
suppressing an increase in volatility and an excessive rise in interest rates. Some of these
members added that, in deciding quantitative and qualitative monetary easing on April 4,
the framework for the Bank’s JGB purchases was designed to allow for flexible operations;
for example, by allowing the average remaining maturity of its JGB purchases to be in the
range of about six to eight years. Based on this discussion, members shared the view that,
as for JGB purchases, it was important for the Bank to conduct operations flexibly to
promote the permeation of policy effects by adjusting — as necessary — the parameters of its
JGB purchases, such as frequency, pace, and allocation of purchase amounts by maturities,
while continuing to carefully monitor developments in the bond market and maintaining a
close dialogue with market participants.
With regard to the relationship between the government’s fiscal conditions and
long-term interest rates, one member noted that it was essential that fiscal discipline be
firmly maintained with a view to ensuring stability in the bond market. In relation to this
point, a different member said that it was also important for the Bank to continue to explain
thoroughly that its JGB purchases were not conducted for the purpose of financing the fiscal
deficit.

Meanwhile, some members pointed out that the recent rise in long-term interest
rates in Japan might be attributable to the possibility that the expected period for which
short-term interest rates remained virtually zero would shorten to some extent, as the rise in
stock prices and the depreciation of the yen progressed and positive developments in
economic activity and prices came to be observed. One member added that it was not
desirable to shorten the policy duration in a premature manner. A few members, including
this member, expressed the view that it was vital for the Bank to firmly anchor short-term
interest rates at low levels by clearly communicating that it was providing the monetary
base on a large scale through various short-term funds-supplying operations, in addition to
JGB purchases. A different member noted that the Bank’s communication regarding the
timing at which the price stability target would be achieved and the time frame for
continuing quantitative and qualitative monetary easing might be destabilizing expectations

for the bond market, and this in turn seemed to be increasing volatility. This member
continued that, if the Bank were to change the expression representing its commitment by
stating that the time frame for continuing quantitative and qualitative monetary easing
should be restricted to about two years, and that thereafter it would review the monetary
easing measures in a flexible manner, this would contribute to the restoration of stability in
the bond market.

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