aviatorslot| Smell the smell of raising interest rates? Japanese government bond yields soar, central bank may intervene early

May the Bank of Japan raise interest rates in advance?

On May 21, the yield on 10-year Japanese government bonds rose to zero.Aviatorslot.9870%, the highest level since May 2013. Market expectations for the Bank of Japan to raise interest rates ahead of time are gradually rising. Japan's finance minister said he would pay close attention to the development of Japanese government bond yields.

Yields on Japanese government bonds hit an 11-year high

Japanese government bond yields generally rose in trading on Tuesday. Among them, the yield on 10-year treasury bonds rose 3 basis points to 0.9870%, the highest level since May 2013; the yield on five-year treasury bonds rose 3 basis points to 0.5850%; and the yield on one-year treasury bonds rose 0.1 basis points to 0.1670%. Japanese 10-year bond yields have recently climbed to the level of former Bank of Japan Governor Toshihiko Kuroda when he began to implement aggressive monetary policy.

Trend of JGBs yield (January 2012 to present)

In march 2013, Mr. Kuroda became governor of the bank of japan, which set a target of 2% inflation in about two years, aimed at getting rid of deflation by implementing loose monetary policy. Japanese government bond yields then gradually fell. In 2016, the Bank of Japan implemented a negative interest rate policy for the first time in history. The BoJ also unveiled an unprecedented new policy of monetary easing around the world, cutting short-term interest rates to negative and keeping long-term interest rates around 0 per cent, while announcing quantitative easing, or YCC, aimed at controlling the yield curve. YCC keeps the yield on 10-year government bonds around zero, and when it deviates beyond a certain range, the Bank of Japan starts buying bonds, anchoring borrowing costs at a low position to boost economic growth.

But since the end of 2022, the Bank of Japan has gradually relaxed the volatility band of 10-year Treasury yields. In December 2022, the bank of japan raised its 10-year yield target from 0.25% to 0.5%.

In July 2023, the Bank of Japan announced that it would expand the target range for 10-year JGBs to fluctuate within 0.5% of JGBs, but would strictly limit the volatility of 10-year JGBs to less than 1% through fixed-rate purchases.

At its monetary policy meeting in March, the BoJ began a policy shift, withdrawing from its eight-year policy of negative interest rates, raising policy rates from minus 0.1 per cent to a range of 0 to 0.1 per cent, ending the yield curve control policy and stopping buying traded open index funds (ETF) and real estate investment trusts (J-REIT). But the Bank of Japan stressed that it would continue to buy JGBs at the current rate, that is, about 6 trillion yen a month in government bond purchases. If long-term interest rates rise rapidly, the Bank of Japan can increase its purchases of JGBs and maintain a loose financial environment.

Just today, Japanese Finance Minister Suzuki Shunichi said that when long-term interest rates rise, dialogue with the market is essential and appropriate bond management policies will be implemented. Prior to this, he said many times in public that Japanese government bond yields are determined by the market under the influence of a variety of factors, and will pay close attention to the development of Japanese government bond yields.

As for the recent rise in JGB yields, Deutsche Bank believes it is due to market expectations that the Bank of Japan may reduce its bond purchases in the coming months to support the weakening yen. At the same time, investors are carefully studying the data and policy makers' statements in an attempt to predict the Bank of Japan's next move. The overnight index swap market expects the BoJ to raise interest rates by about 57 per cent in July, compared with about 50 per cent in early May.

The trend of the yen is the key

How the BoJ adjusts its bond-buying programme is crucial for money markets as the wide yield gap between Japan and the rest of the world has caused the yen to fall to a 34-year low against the dollar. At the beginning of last week, the Bank of Japan unexpectedly cut the number of bonds it bought in routine operations, and yields on some Japanese sovereign bonds soared to their highest level in a decade.

Western Asset Management (WesternAssetManagement), a $385.4 billion asset management company owned by American fund giant Franklin Templeton, believes that since the Bank of Japan is unlikely to reduce its holdings of ultra-long-term debt, the yield on 30-year JGBs will not rise as much as short-term bonds. HiroyukiKimura, head of investment management in Japan, said in an interview last week that demand for ultra-long-term bonds from life insurers and other institutions should also stop yields from rising too much.

As for the yield on the benchmark 10-year Treasury bond, Hiroshi Kimura thinksAviatorslot"the yield will rise as the Bank of Japan gradually raises interest rates, but will not substantially exceed 1 per cent." On the other hand, he does not expect the yield on the 30-year bond to exceed 2%, resulting in a flattening of the yield curve of about 10Mel 20 basis points.

Hiroshi Kimura also believes that Kazuo Ueda, governor of the Bank of Japan, has made it clear that reducing the purchase of JGBs has nothing to do with monetary policy measures, which means that "the Bank of Japan will try to communicate with the market and avoid creating any surprises." He said the BoJ was unlikely to cut monthly purchases from Y6,000bn to Y5tn ($32 billion) in June or July and would reduce its holdings in a cautious manner.

Institutions are still divided over when and how many times the Bank of Japan will raise interest rates again this year.

Hiroshi Kimura believes that the Bank of Japan still needs to see more economic data to determine when it can raise interest rates again, so the July meeting is too early.

Pacific Investment Management (PacificInvestment Management Co.) expects the Bank of Japan to raise interest rates three more times this year. AlesKoutny, head of international interest rates at VanguardGroup Inc., expects the BoJ's policy rate to reach about 0.75% by the end of the year.

Contrary to the views of Pacific (601099) Investment Management and Vanguard, AB said last week that the BoJ might prefer to shrink its large balance sheet rather than raise interest rates.

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