Japan Bonds Biggest Winners as Stocks Soar, Yen Tumbles on BOJ

Inside the BOJ's Negative-Rate Strategy
  • Benchmark 10-year yields plunge to record low of 0.09%
  • Yen heading for its biggest decline in more than a year

Bank of Japan Governor Haruhiko Kuroda’s latest surprise sent stocks soaring, and the yen crashing, but bonds were the big winner from his decision to set negative interest rates.

The Topix index soared 2.9 percent, bringing this week’s gain to 4.2 percent, the most since October. Benchmark 10-year yields fell to an unprecedented 0.09 percent, and dropped by more than half in their steepest decline since 2003. The yen weakened 1.7 percent, the biggest decline in more than a year.

Kuroda made good on his recent pledge to do whatever it takes to spur inflation, setting a rate of minus 0.1 percent on certain holdings of funds kept at the central bank. He said Friday at a Tokyo press conference he’ll cut further if needed. Data showed consumer prices are near zero, industrial production fell and household spending dropped, adding pressure on policy makers to act.

“The BOJ’s move was perceived favorably by the markets,” said Tetsuya Inoue, a former BOJ official and the chief researcher for financial technology and markets at Nomura Research Institute Ltd. in Tokyo. “These measures allow more options for the BOJ.”

Record-Low Yields

Yields on five- and two-year Japanese government bonds, or JGBs, also fell to records at below zero. Five-year JGBs at minus 0.07 percent are still above the minus 0.29 percent offered by similar-dated German debt. At the same time 10-year Japanese yields are below the 0.36 percent offered by bunds.

“I would actually put a more than 50 percent chance that we will see negative 10-year rates in the next one month,” said Takuji Okubo, the Tokyo-based chief economist at Japan Macro Advisors. “I wouldn’t be surprised if we were to see an extended depreciation of the yen in the next couple of weeks.”

The BOJ is following the European Central Bank in using negative interest rates, according to Hideaki Kuriki, a bond investor in Tokyo at Sumitomo Mitsui Trust Asset Management, which oversees $55.4 billion.

“It’s a surprise” he said. “I thought the BOJ would hold policy. They think the ECB policy is successful so they’re taking the same policy. JGB yields will go down.”

The yen tumbled on concern investors looking for yield will take money out of Japan. A weaker currency can help the economy because it supports growth by drawing buyers to the nation’s exports. Japan’s currency traded at 120.87 per dollar as of 9:12 a.m. in London. It was as weak as 121.42, a level not seen since December.

“This is positive for equities,” said Khiem Do, the Hong Kong-based head of multi-asset strategy at Baring Asset Management, which oversees about $41 billion. “They’re trying to weaken the yen to boost exports and get savers to spend.”

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