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Japan Yields Capped at 1.5% in 2011 on BOJ Policy, Analysts Say

Japan’s benchmark bond yields will be capped at 1.5 percent next year as the central bank keeps interest rates near zero to counter deflation, Tokyo-based analysts predict.

The 10-year yield will end 2011 at 1.325 percent, the median forecast in the survey of 16 analysts shows, compared with today’s 1.15 percent. Nine of those surveyed expect the rate to fall below 1 percent at some stage during the year as the Bank of Japan keeps an accommodative monetary policy to help counter deflation.

“With the central bank remaining cautious about the outlook for the economy and prices, I can’t see any factors that may lead to a surge in long-term yields,” said Jun Ishii, chief fixed-income strategist at Mitsubishi UFJ Morgan Stanley Securities Co., who forecasts the 10-year rate will end next year at 1.3 percent.

Japan’s bond yields are the lowest in the world, according to data compiled by Bloomberg covering 32 markets, even after 10-year rates have climbed more than a quarter percentage point from this year’s low in October. A total of 908.8 trillion yen ($10.8 trillion) of so-called JGBs are outstanding, making them the world’s largest debt market.

Ten-year yields started this year at 1.285 percent before reaching their 2010 high of 1.405 percent on April 7. They then slumped to a seven-year low as 0.82 percent on Oct. 6 as speculation the global recovery was waning boosted debt demand. Rates climbed as high as 1.295 percent on Dec. 15 as that concern waned.

The last time yield were above 1.5 percent was June 2009.

BOJ Commitment

The Bank of Japan’s commitment to keep interest rates low leaves limited room for yields to rise further, according to Akitsugu Bandou, a senior economist at Okasan Securities Co.

“I don’t think long-term yields will rise sharply because the BOJ will keep its monetary policy loose,” Bandou said. “Gains in yields will likely be limited even if the economy recovers.”

Bandou predicts the 10-year yield will fall as low as 1 percent during the year before ending 2011 at 1.5 percent.

BOJ Governor Masaaki Shirakawa and his policy board cut the key overnight lending rate to a range of zero to 0.1 percent on Oct. 5, and pledged to keep it there until they can forecast stable prices.

Asset Purchases

The central bank is buying government debt, corporate bonds, real-estate investment trusts and exchange-traded funds to pump money into financial markets and keep borrowing costs low. The central bank will “steadily” provide additional liquidity, Shirakawa said after a policy meeting yesterday where he kept the benchmark rate unchanged.

BOJ policy makers in October forecast consumer prices excluding fresh food will rise 0.1 percent in the year starting April 1 after falling this year. Core prices declined for a 20th month in October, the statistics bureau said Nov. 26.

A revision of the base year used to calculate consumer prices scheduled for August 2011 may make it difficult for the BOJ to exit its zero-rate policy. The previous revision pushed down price data, leading to a decline in bond yields.

While there may be an increase in growth signs in the first half of 2011, the market’s concern will shift in the second half to whether the recovery is sustainable, holding down bond yields, said Chotaro Morita, chief strategist at Barclays Capital Japan Ltd. in Tokyo.

Ten-year rates will end 2011 at 0.9 percent, he predicts.

Benchmark yields will end next year at 1.25 percent, according to a separate Bloomberg survey of 15 analysts with the most recent forecasts given the heaviest weightings.

Japan 10-Year Yield Forecasts 2011
                                             Range      End 2011
Akito Fukunaga, RBS Securities               1.0-1.7    1.55
Seiji Shiraishi, HSBC Securities             0.9-1.4    1.0
Akitsugu Bandou, Okasan Securities           1.0-1.6    1.5
Susumu Kato, Credit Agricole                 0.9-1.5    1.35
Kenro Kawano, Credit Suisse                  0.8-1.5    1.3
Takafumi Yamawaki, JPMorgan Chase            0.9-1.5    1.35
Koichi Ono, Daiwa Securities                 0.9-1.5    1.4
Makoto Yamashita, Deutsche Securities        0.8-1.4    1.2
Kazuhiko Sano, Tokai Tokyo Securities        0.9-1.5    1.25
Shinji Nomura, Nikko Cordial                 1.0-1.7    1.7
Chotaro Morita, Barclays Capital             0.8-1.4    0.9
Koji Shimamoto, BNP Paribas                  1.1-1.6    1.6
Tetsuya Miura, Mizuho Securities             0.9-1.5    1.3
Akihiko Inoue, Mizuho Investors Securities   1.0-1.6    1.4
Jun Ishii, Mitsubishi UFJ Morgan Stanley     1.0-1.4    1.3
Shogo Fujita, Bank of America Merrill        1.0-1.65   1.2

Average:   1.33
Median:    1.325

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