Sub-Zero Bond Yields Becoming the Norm as Japan Rivals Germany

  • Tomato farmer says stupid to keep money in savings accounts
  • `Impossible to see where the bottom will be': MUFJ Kokusai

Less than two weeks after Bank of Japan Governor Haruhiko Kuroda announced negative interest rates, the nation is matching Germany with two out of every three government bonds offering yields below zero.

The yield on the benchmark 10-year Japanese government bond sank to minus 0.035 percent Tuesday in Tokyo in a first for any Group-of-Seven economy, as the effect of the central bank’s pledge combined with demand for haven assets amid global markets turmoil. Japan had about 72 percent of its sovereign bonds yielding less than zero on Tuesday in Tokyo, about the same as Germany, which had a 19-month head start. The 10-year bund yield fell below 0.2 percent for the first time since April on Tuesday.

“It’s symbolic,” Masayuki Koguchi, chief yen-bond fund manager at Mitsubishi UFJ Kokusai Asset Management in Tokyo, said of the 10-year JGB yield’s drop below zero. “Other than the feeling that the market might have gotten overheated, I can’t see any reason to sell. Speculative investors have come in wanting to test how low yields can go, so it’s impossible to see where the bottom will be.”

While unprecedented stimulus from the BOJ and the European Central Bank has been successful in driving down government yields, Kuroda and his counterpart Mario Draghi are finding the impact of their stimulus moves is being confined to bond markets as stocks drop and their currencies strengthen. The yen’sclimb to a more than one-year high is calling into question the BOJ’s effectiveness in stoking inflation toward its 2 percent target. Proponents argue it will drive spending among businesses and households, while critics contend it impoverishes commercial lenders and their customers.

Kuroda Bazooka

Japan’s 10-year bond yield has dropped from 0.22 percent before the BOJ surprised markets with the decision on Jan. 29 to introduce a minus 0.1 percent rate on some of the reserves financial institutions park at the central bank.

It was at minus 0.025 percent at the end of trading Tuesday, the lowest globally after Switzerland’s minus 0.31 percent long-term yield. The premium offered over two-year securities earlier shrank to as little as 12 basis points.

The yen strengthened beyond 115 to the dollar for the first time since November 2014.

Kazuhiko Sano, the chief bond strategist at Tokai Tokyo Securities Co. who correctly predicted the 10-year JGB yield’s drop to 0.5 percent, 0.25 percent, 0.1 percent, and below zero over the past four years, suggests the central bank may be getting more than it bargained for.

How Far?

“Kuroda said when he introduced negative interest rates that he was aiming to flatten the yield curve, so in that sense the policy is working as planned,” Sano said. “However, I don’t know just how far he intended the yield to drop.”

The negative-rate policy, which takes effect from Feb. 16, is already filtering into the banking system, with Mizuho Bank Ltd. cutting its long-term prime lending rate to a record-low 1 percent.

At the same time, a bond-market measure of inflation expectations for a decade from now sank to 0.24 percent, from 0.72 percent at the end of last year. The index the central bank uses for its 2 percent inflation target languished near zero throughout 2015.

“Markets are seeing the negative side of minus rates, that it is weakening financial institutions and that it’s not a reflationary policy but is essentially planting a deflationary mindset in people,” said Jun Kato, a senior fund manager in Tokyo at Shinkin Asset Management. “People are skeptical that further monetary policy action can help lift the economy.”

Yoshihisa Yamamoto, a tomato farmer from Shizuoka Prefecture, central Japan, who is also a retail foreign-exchange trader, says he keeps the majority of the money that isn’t invested at his house instead of in a bank.

“For many years now there has been absolutely no interest, so it’s stupid to keep money in a savings account,” 63-year-old Yamamoto said. “I have less than 3 percent of my money in the bank.”

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