Japan Seen Stuck With Negative Yields on 70% of Bonds for 2016

Off the Charts: Japan Government Bonds
  • Primary dealers' median forecast for 10-year yield at -0.1%
  • `The BOJ has dominated the bond market,' JPMorgan Chase says

Japanese primary dealers say negative bond yields are here to stay in 2016, and room for capital gains has run out.

Nine of 13 respondents to a poll conducted last week predict the benchmark 10-year Japanese government bond yield will end the year below zero, after sinking to a record minus 0.135 percent on March 18. The lowest forecast of minus 0.2 percent comes from Morgan Stanley MUFG Securities Co., while the median of minus 0.1 percent is in line with analyst estimates for Switzerland.

Three years after the start of the Bank of Japan’s unprecedented quantitative and qualitative easing, or QQE, and two months since the surprise announcement of negative interest rates, bond investors are still trying to adjust to the conditions that have turned yields on 70 percent of the market negative. Even amid such extreme measures, the central bank has failed to prevent inflation from flatlining for more than a year. Most of the dealers surveyed expect a further expansion of stimulus. 

Dominating Market

“The BOJ has dominated the bond market,” said Takafumi Yamawaki, the chief rates strategist in Tokyo at JPMorgan Chase & Co., who sees the 10-year note yielding minus 0.15 percent at year-end. “Yields will remain deeply depressed.”

An investor would just about break even if the 10-year JGB yield ended the year at minus 0.1 percent, after accounting for reinvested interest, according to data compiled by Bloomberg.

The 10-year yield was at minus 0.095 percent at 10 a.m. in Tokyo on Monday, the lowest globally after Switzerland’s minus 0.35 percent. The equivalent U.S. Treasury note yielded 1.9 percent.

JGBs have returned 5.7 percent over the past six months, the most of 26 sovereign debt markets tracked by Bloomberg, as yields pushed ever lower amid pressure from BOJ easing.

‘Go Long’

“We expect an expansion of stimulus, and if the market happens to rule out any additional boost in stimulus, that would create an opportunity to go long,” said Takeki Fukushima, a rates strategist at Citigroup Global Markets Japan Inc. in Tokyo, who predicts the 10-year note will yield about minus 0.15 percent at year-end.

The BOJ owns an unprecedented one-third of outstanding JGBs, more than any other class of investor, as it snaps up as much as 12 trillion yen ($106 billion) of the debt each month. The result has been a loss of liquidity that has heightened volatility and hurt market functionality.

Even so, in answering Bloomberg’s questionnaire -- which didn’t explicitly ask about the outlook for stimulus -- eight of the 13 dealers said they expect additional easing at some point.

Japan has a total of 22 primary dealers, which the central bank calls “JGB Special Market Participants,” who are required to bid at government auctions and make a market for the debt.

In Bloomberg’s most recent analyst survey -- before the BOJ’s March meeting at which policy settings were left unchanged -- 35 of the 40 respondents predicted an expansion of stimulus by July.

Makoto Suzuki, the senior bond strategist at Okasan Securities Group Inc., expects the 10-year JGB yield to dip as low as minus 0.25 percent before ending the year at minus 0.1 percent amid deeper cuts to the deposit rate. At the same time, he’s not convinced additional BOJ easing can reinvigorate the recovery.

“It’s difficult to imagine more effective monetary policy than what’s already in place,” he said. “Unless the government takes drastic action, monetary stimulus will have to continue indefinitely.”

Primary Dealer10-Year JGB Yield Forecast
Morgan Stanley MUFG Securities Co.-0.20%
Citigroup Global Markets Japan Inc.-0.15%
JPMorgan Chase & Co.-0.15%
Mizuho Securities Co.-0.15%
Tokai Tokyo Securities Co.-0.15%
Mitsubishi UFJ Morgan Stanley Securities Co.-0.10%
Okasan Securities Group Inc.-0.10%
Barclays Securities Japan Ltd.-0.05%
Daiwa Securities Co.-0.05%
Deutsche Securities Inc.0%
Merrill Lynch Japan Securities Co.0.05%
Sumitomo Mitsui Banking Corp.0.10%
UBS Securities Japan Co.0.10%
Median Forecast-0.10%
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