Kuroda Sways Japan Bond Market on Inflation Without New Stimulus

Updated on
  • BOJ's core-core CPI index shows gain of 1.2% for second month
  • Ten-year break-even rate has rebounded from 9-month low

Bank of Japan Governor Haruhiko Kuroda is starting to convince bond investors he can revive inflation without extra monetary easing.

The debt market’s inflation expectations for the coming decade are starting to tick higher following a six-month slide, even after the central bank defied rising conjecture among analysts for more stimulus by leaving policy settings unchanged. The yield curve suggests buyers have been unwinding bets that the BOJ will expand purchases of long-term debt, while a measure of market volatility declined to the lowest in more than a year.

What Kuroda has done is focus attention away from the core consumer-price index, which is used to measure progress toward its 2 percent inflation target, and which languished below zero for a third month in October. The BOJ began publishing an alternative gauge that strips out both fresh food and energy prices, and which showed inflation rose at a 1.2 percent clip for a second month.

“With the BOJ publishing its own consumer-price index while stressing the importance of looking at a variety of indicators, it’s starting to win market participants over,” said Makoto Suzuki, a senior bond strategist at the Japanese brokerage. “That core CPI is negative is not really a big deal, though the central bank is still far from reaching its target.”

Yields Capped

Okasan Securities predicts long-term Japanese government bond yields will remain depressed as the BOJ continues its unprecedented asset-purchase program, which has scope to buy every new bond the government issues.

Yields on 10-year securities have touched 0.295 percent on three occasions in the past month, a level last seen in April. They were at 0.3 percent on Monday in Tokyo, the lowest globally after Switzerland. Central bank quantitative easing helped push yields to a record low of 0.195 percent in January.

The 10-year break-even rate -- a market gauge of inflation expectations derived from a yield gap between nominal and index-linked bonds -- reached a one-month high of 0.83 percent, climbing from a nine-month low of 0.74 percent reached Nov. 12.

The core CPI measure, excluding fresh food and the effect of the consumption tax increase in April 2014, and the BOJ’s core-core index, which strips out both fresh food and energy, have diverged since the start of this year. In December, both were at 0.5 percent.

BOJ’s Message

“Since the BOJ is sending a message that they are looking at prices stripping out energy and fresh food, economists have little choice but to focus on those numbers as well,” said Atsushi Takeda, an economist at Itochu Corp. in Tokyo. “Economists are looking at both the core CPI and the core-core CPI in terms of examining the price trend and monetary policy implications.”

Kuroda has repeatedly said that quantitative easing is having the intended effects, while he reiterated on Monday that wages must also rise to spur a revival in Japan’s economy. Base pay rose eight of the nine months through September.

More analysts now say the central bank is finished expanding stimulus, even as they are almost unanimous in predicting 2 percent inflation won’t be reached by the target time frame, which policy makers extended for a second time this year on Oct. 30, to the six months from October 2016 to March 2017.

Less Volatility

Investors that had bought longer-term bonds in anticipation that the BOJ would need to shift its purchases further down the curve have been unwinding those positions. The spread between two- and 30-year debt yields rose as much as 11 basis points from an almost six-month low of 131 basis points on Oct. 23. Even so, the S&P/JPX JGB VIX gauge of market volatility dropped this month to its lowest level since August last year.

“As long as the deflation mindset is removed and inflation expectations are above zero, core CPI doesn’t necessarily have to be at 2 percent,” said Hiromichi Shirakawa, chief Japan economist at Credit Suisse Group AG in Tokyo, and a former BOJ official. “Bond investors would probably be fine with an inflation rate of around 1 percent if the central bank continues to buy some level of debt.”

— With assistance by Keiko Ujikane, and James Mayger

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