The BOJ meets later this week and while economists see no change to policy, wagers on a tweak have ramped up this month. The BOJ is the last holdout among developed central banks sticking to rock-bottom interest rates to boost the economy and its short-term policy rate remains at minus 0.1%. BOJ Governor Haruhiko Kuroda has made clear he had no intention to change policy. While it keeps its short-term interest rate at -0.1%, a 0.25% cap it enforces on 10-year government debt is under renewed pressure.
Analysts have said that the Japan interest rate is unlikely to rise until Governor Haruhiko Kuroda retires in Q1 2023 after 10 years of leading the BoJ. The 10-year yield has climbed above the central bank’s policy ceiling twice this week and the BOJ has announced unscheduled bond purchases to rein it back in. Japan Securities Dealers Association data Thursday showed foreign net selling of 10-year JGBs in September was the most since June.
Ten-year swap rates a popular tool for international funds to express a view on Japanese yields have broken above 0.6% to a more than eight-year high, well beyond the BOJ’s 0.25% line in the sand for benchmark bond equivalents. That’s a sign that at least some traders are betting Japanese authorities will be forced to capitulate on their policy of capping 10-year yields to help boost the economy.
The yield on the 10-year note briefly rose 0.5 basis points to 0.255% Thursday as the Bank of Japan held the first unscheduled bond-buying operation this month. Global yields have continued to march higher as traders increase their expectations for peak Federal Reserve policy rates. The BOJ plans to buy 250 billion yen ($1.7 billion) of bonds ranging from 5-year to longer-dated debt. It separately offered to purchase an unlimited quantity of 10-year notes at a yield of 0.25%. The Bank of Japan has now boosted its ownership of the nation’s 10-year bonds to almost 70% in its efforts to cap yields, further threatening already dwindling liquidity.
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The BOJ’s ultra-accommodative policy has driven the yen to its weakest since 1990, despite the Ministry of Finance’s intervention to stem losses, with traders focusing on the yawning gap between Japanese and US benchmark yields. Speculation is growing that the currency depreciation will eventually force the central bank to let 10-year yields move higher, as other major central banks globally relentlessly raise rates.
The Japanese yen has continued to depreciate against the US dollar (USD/JPY). The yen has fallen almost 30% against the dollar this year, making it the worst performer among major currencies, even after Japan’s intervention last week. The BOJ’s insistence on maintaining rock-bottom interest rates while the Federal Reserve and others raise borrowing costs at speed is seen as one of the main factors contributing to the slide.
Japan likely conducted its biggest-ever currency intervention to prop up the yen late Friday, based on Bank of Japan balance of payment figures and an estimate of flows by money broker Central Tanshi Co. The size of Friday’s suspected market action is estimated to be as much as 5.5 trillion yen ($36.8 billion), according to a basic calculation using the BOJ’s forecast for the change in its current account and the Central Tanshi projection for the balance assuming no intervention.
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There, inflation has hit 3% for the first time in over three decades excluding the impact of tax hikes, an acceleration that adds to the doubts over the need for continued central bank stimulus. While energy remained the biggest contributor to price rises from a year earlier, gains in processed food and household durable goods were behind the further acceleration in inflation in September. That shows that inflation is spreading beyond the power sector. “In October, inflation may reach 3.3% or 3.4% as many food prices are going up, mobile phone fees are giving a lift, and service prices are rising,” said Mari Iwashita, chief market economist at Daiwa Securities Co. “The BOJ seems to focus on downside risks overseas to conclude that it will need to keep up monetary easing. It strikes me that they have already made the decision to maintain easing.”
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Governor Haruhiko Kuroda is likely to keep arguing that wages need to increase much more before the BOJ’s goal of stable inflation has been achieved. Kuroda has repeatedly argued that the current strength of price gains is based on cost-push factors such as energy imports that will dissipate in the coming year.
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