Negative Yields Deepen in Japan as Yen Beyond 100 Tests Kuroda

Updated on
  • Bonds gaining amid speculation BOJ will ease more: JPMorgan
  • Kuroda and Aso say central banks have swap lines ready

Japan’s negative bond yields plunged to unprecedented depths as a rallying yen and plunging stocks added to speculation the Bank of Japan will step up stimulus.

The U.K.’s vote to leave the European Union rocked global markets, prompting a flight to safety that cut the 10-year Japanese government bond yield to a record minus 0.215 percent. That on 30-year debt dropped to an unprecedented 0.125 percent, as Japan’s currency surged as much as 7 yen against the dollar and the Topix index of shares tumbled more than 7 percent.

“Yields are falling on expectations the BOJ will have to add stimulus amid this turmoil,” said Takafumi Yamawaki, the chief rates strategist in Tokyo at JPMorgan Chase & Co. “The stock market plunge and the yen’s strength are adding to that and exerting downward pressures on yields.”

The yen’s jump past 100 per dollar and the slump in stocks renew pressure on the BOJ to increase assets purchases after its decision last week to leave monetary policy unchanged for a third straight meeting spurred a surge in the currency and rout in equities. While Kuroda has said that the central bank will add stimulus if needed, he’s already facing criticism from Japanese lawmakers and investors for adopting a negative interest-rate policy in January.

Reminiscent of Lehman

Japan’s 10-year bond yields fell five basis points to minus 0.195 percent as of 4:11 p.m. in Tokyo from Thursday, after touching the record low, according to Japan Bond Trading Co. The price rose 0.520 yen to 103.001. Ten-year bond futures for September delivery touched a record high of 152.91.  

“This is similar to the Lehman shock -- it will take some time to recover,” Makoto Suzuki, a senior bond strategist at Okasan Securities Group Inc. said, referring to the global financial crisis in 2008 that intensified after the collapse of Lehman Brothers Holdings Inc. “We’re expecting financial markets to remain unstable and that would make additional stimulus by the BOJ more likely, so yields will test the lows.”

The Japanese yen soared to as high as 99.02 per dollar, the strongest since November 2013 amid concern Brexit will drag down already tepid global growth, spurring demand for this year’s best-performing major currency as a haven.

Kuroda and Japan’s Finance Minister Taro Aso, whose country currently heads the Group of Seven, highlighted that central banks of six major developed nations have currency-swap lines at the ready to provide liquidity following the Brexit results.

“We are expecting further decline in yields next week,” said Genji Tsukatani, Tokyo-based fund manager at JPMorgan Asset Management Inc. “The focus would be whether there will be some coordinated intervention and additional monetary expansion.”