Year of the Rooster: Japan’s 10-year yield target
In early 2017 Japan was continuing to conduct its quantitative easing policies, as part of a broader plan to create inflation and stimulate economic growth.
Part of these efforts included its desire to maintain its recently-introduced zero-rate, 10-year Japanese government bond (JGB) yield target. So as part of our outlook questions, we asked economists and investment industry experts the following:
Will the Bank of Japan be forced to rethink its 10-year bond yield target?
Answer: No
As we noted last year, the Bank of Japan (BOJ) originally decided upon a policy of keeping a zero percent yield on its 10-year JGBs on September 21, 2016. It did so as part of its broader policy of trying to force investor money out of government bonds and into other investment areas, to help stimulate the rest of the economy and other markets.
Back in early 2017 we were sceptical that it would rethink the policy. Our feeling was that the the Japanese government of Prime Minister Shinzo Abe and the BOJ were both committed to sticking with the 'Three Arrow' policy and that it considered the 10-year zero yield target to be an important part of this, along with measures such as committing to buy ¥80 trillion ($73.27 billion) of JGBs each year (it ended up buying about ¥58 billion in 2017).
We also noted that the relative weakness of the Japanese yen versus other currencies was a potential boon to the government and could possibly introduce a modest level of inflation into its economy. The lack of appeal of local instruments was underpinned too in the weeks after Donald Trump was elected to the US presidency as other countries sold more debt, widening their yields versus Japanese bonds.
In the end we were shown to be correct: the BOJ held firm to the policy during the first half of 2017 and its mandate to do so was reaffirmed when Abe called a snap election that he handily won in September. As of today, the policy still stands.
However, early this year there was one indication that the Japanese central bank might revisit its loose monetary policy. On January 9 the BOJ announced that it would buy fewer long-dated JGBs, which market traders took as a sign that the central bank was beginning to slowly tighten its monetary policy.
By reducing its purchase of such bonds, the BOJ would essentially leave it to the market to do so. Since the market would likely demand higher yields, that would probably end the zero yield policy for 10-year JGBs.
However, the jury is still out on whether it will do so. BOJ governor Hirohiko Kuroda has repeatedly stated the bank's dedication to maintaining stimulus and there are no immediate signs the bank is changing this signature policy. He even ruled out a short-term rate hike on February 5, saying that despite a decent economy the signs of inflation remained too anaemic to withdraw stimulus.
For local investors, this has meant that almost any other assets remain more appealing than JGBs. The swap rate has made offshore investments more expensive, but there is still appeal to be found in the debt of other nations. And the drop in local equity valuations over the past few days has meant that investors with a taste for risk probably have a good entry point into equities.
Previous Year of the Rooster reviews: