BOJ Said to Be Concerned Japan Bond Market Ignores InflationMasahiro Hidaka and Toru Fujioka
Bank of Japan officials are increasingly concerned the nation’s bond market is failing to reflect emerging inflation, raising the risk of a sudden surge in yields, according to people familiar with the matter.
Japan’s benchmark 10-year government bonds yield 0.615 percent, little changed from March 2013, even after a jump in the consumer-price inflation rate of almost 2.5 percentage points since then. The yields have been held down by the BOJ’s own purchases, part of its unprecedented monetary stimulus unleashed by Governor Haruhiko Kuroda a year ago.
While Kuroda has said easing should put downward pressure on market rates, that doesn’t mean the BOJ has a target for yields, according to the people, who asked not to be named because the discussions were private. The concern among officials reflects a dilemma for the central bank of both wanting to hold down borrowing costs so growth can strengthen and to avoid market disruptions that roil the economy. Officials hope yields will rise gradually, in line with developments in the economy and prices, the people said.
“I am very worried about the risk of yields spiking,” said Mitsuru Saito, chief economist at Tokai Tokyo Financial Holdings Inc. “The BOJ is keeping yields down with massive bond purchases. If the BOJ even hints that an exit is near, there is the possibility that long-term yields will surge a lot. At that point, I don’t know how the BOJ will keep that down -- it will be a period of unimaginable difficulty.”
The risk of abrupt moves in bond prices will increase if 10-year yields stay near 0.6 percent regardless of improvement in the economy and faster gains in consumer prices, said the people.
Ten-year government bond futures fell after publication of the officials’ comments yesterday, and were down 0.1 percent at 08:45 a.m. in Tokyo today.
Tokyo prices jumped 2.7 percent in April from a year earlier as a sales-tax increase boosted inflation. The measure excludes volatile fresh foods. Nationally, core inflation was at
1.3 percent in March.
Commenting on the BOJ officials’ views, Barclays Plc fixed-income strategist Noriatsu Tanji said it’s “worth bearing in mind” a scenario in which investors start to anticipate the risk of 2 percent inflation in the second half of this year.
At the same time, price gains remain below the central bank’s target and Barclays’ main scenario is for inflation, stripping out the impact of the sales-tax increase, to be 1.2 percent in the fourth quarter, Tanji said in a note today.
The BOJ accumulates Japanese government bonds at a pace of about 50 trillion yen ($488 billion) a year, helping to hold down borrowing costs for Prime Minister Shinzo Abe as he balances managing the world’s heaviest debt burden with trying to drive Japan out of 15 years of deflation.
After the BOJ announced its easing in April last year, the 10-year government bond yield swung from a record low of 0.315 percent to as much as 1 percent in the next month.
Projections by the BOJ and private economists indicate the central bank was the more accurate forecaster of consumer price trends after Kuroda began record stimulus, according to Japan Center for Economic Research.
In April last year, economists polled by JCER projected
0.27 percent inflation for the year ended March, while the BOJ forecast 0.7 percent. Data due today are likely to show prices gained 0.81 percent for the full-year, according to the latest estimates by analysts surveyed by JCER.
Kuroda indicated on April 23 there was a limit to how long the BOJ would continue to support the bond market, saying the central bank won’t buy bonds just to keep down debt-servicing costs after it achieves its goal of stable 2 percent inflation.
The BOJ’s stimulus is leaving Japan at risk of falling into a quantitative-easing “trap” of being unable to taper its asset purchases without triggering a surge in long-term rates that damages the economy, according to Richard Koo, chief economist in Tokyo at Nomura Research Institute Ltd.
While Kuroda said on April 8 the BOJ wasn’t discussing an exit from easing now, he said excess slack in the economy was “approaching zero” -- a sign he may be laying the groundwork for an eventual reduction in asset purchases, said Koo, a former Federal Reserve economist, in an April 22 note.
“Kuroda’s remark on the deflationary gap was probably not what market participants addicted to QE wanted to hear,” Koo said. “But if it represents the first step in an effort to avoid the QE trap, it should be welcomed as a major long-term positive for Japanese growth.”
Japan’s debt will equal 242 percent of gross domestic product by the end of 2014, according to the International Monetary Fund. Debt-servicing costs for this fiscal year’s budget are based on a 10-year bond yield of 1.8 percent, according to the Ministry of Finance.
An increase in yields of 1 percentage point would lead to 7.5 trillion yen in capital losses on bond holdings of Japan’s financial institutions, assuming rates on all maturities shift up evenly, the central bank said in a report this week.