Having been on tip toes in the days leading up to Tuesday’s announcement from the Bank of Japan (BoJ) regarding their quantitative easing policy, bond markets rallied during the Tokyo trading day, with the yield on Japan’s benchmark 10-year debt falling 5 basis points to 0.04%.

The yen weakened by as much as 0.5% in the approach to the start of US trade, reaching ¥111.58 per dollar. Tokyo-listed banks fell, with the Topix closing down 0.8 per cent, the biggest decline among Asia-Pacific indices.

Tuesday came and the Bank of Japan (BoJ) stated that it would not join other major central banks around the world but rather maintain ‘extremely low’ interest rates for a prolonged period.

After being forced three times within a week to intervene to cap bond yields amid expectations one would assume that policymakers would be willing to tighten their easy money regime, however the central bank declared it was strengthening the framework for unceasing powerful monetary easing.

The bank repeated that it will continue to purchase bonds so that 10-year JGB yields remains at around 0%.

In addition to, the BoJ stated that it would modify the balance of its $54bn per year exchange traded funds buying programme so that a much greater proportion was focused on ETFs that track the broader, market cap-weighted Topix index rather than anything else.

Inflation in Japan remains passive with prices, excluding fresh food and energy, up only 0.2% in June. This drove the BoJ to lower its inflation forecasts on Tuesday, which predicted price rises of 1.6% in the year compared with 1.8% that was projected in April.

Fixed income

After the announcement on Tuesday, Japanese Bond yields increased due to a bond auction while bond futures dropped after investors had a tepid response to the said auction.

The weak response occurred even as the 10-year yield has more than quadrupled in less than two weeks in a shot triggered by speculation that the Bank of Japan will adjust its ultra-loose policy. While the BoJ abstained from making major changes on Tuesday, it signalled a tolerance for the yield to deviate as much as 0.2 percentage points either side of its zero percent, double the previous range.

Due to this, volatility has returned to Japanese bond markets. Moves in 10-year government debt futures were so extreme on Wednesday that they triggered an emergency margin call from the clearing house.

Market participants expect yields to continue to increase, further steepening the curve and increasing the desirability of longer-maturity debt for Japan’s investors.

Should the BoJ’s new forward guidance moderate the steepness higher yields are causing, then there would be some sort of control. But how likely is it for the steepening to be sustained?

The BoJ’s vast monetary stimulus programme might not be sustainable over the long-term. It is to no surprise that Japan cannot get a grip on their economy; their economic metrics have shown to fluctuate extremely. Case in point, the size of the BoJ’s balance sheet, as a percentage of GDP, is 98%, compared to the US, which is just over 20%.

Disclaimer: This article was issued by Maria Fenech, investment manager support officer at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.


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