Japan's 10-Year Bond Yield Surpasses 1% for the First Time Since 2013

Japan's Bond Market Nearing Collapse?

Japan's bond market is gradually moving towards a potential collapse. The Bank of Japan (BOJ) is caught in a difficult situation. On one side, it has to deal with rising inflation and is compelled to tighten its monetary policy to support the weakening yen and prevent social unrest. On the other side, this tightening is causing bond yields to surge as the BOJ reduces its role as the primary buyer, in a market where it is the majority owner. Today, the yield on Japan's 10-year government bond reached 1% for the first time in 11 years, driven by increasing expectations that the BOJ will have to implement further tightening measures in the coming months as inflation continues to be a problem.

Yields Reach Historic Levels

The 10-year yield briefly hit the 1% mark on Wednesday, its highest level since May 2013, before fluctuating above and below this historic level throughout the day. Yields on longer-term Japanese Government Bonds (JGB) rose more sharply than the 10-year yield, with the 30-year yield recently reaching 2.140%, a rise of 5.5 basis points.

Speculation on Future BOJ Actions

Investors are speculating about when the BOJ will raise rates again and possibly reduce its government-bond purchases. This comes after the BOJ stopped its negative interest-rate policy and put a halt to many of its unconventional easing measures in March. These moves were seen as dovish and were so well signaled that the decision to "tighten" actually caused the yen to drop, leading to even more inflation.

Supporting the Yen

Some analysts believe that the BOJ might reduce its bond purchases to help support the yen, which has fallen sharply over the past few years. This is due to the BOJ's ultra-loose monetary policy, while other central banks have been raising interest rates. Last week, the BOJ announced plans to buy fewer Japanese government bonds maturing in five to 10 years compared to its previous operation, and maintained this reduced amount on Friday. This has led to speculation that it will begin to reduce its monthly JGB purchases.

Market Volatility Decreases

Shusuke Yamada, a strategist at BofA, commented on the yen's muted reaction to the 10-year JGB yield hitting 1%. He noted that the decrease in market volatility has made it easier to sell the yen for low-interest-rate carry trades. The USDJPY rose to a session high of 156.60 briefly in Tokyo as outward direct investment and outward securities investment through NISA continue to be in the background. As for yen interest rates, nominal rates are rising, but real rates are still negative.

Japan-US Interest Rate Differential

Yamada also pointed out that the short-term interest rate differential between Japan and the US is still above 5%, which is the target of the carry, and the yen is not going to strengthen just because the interest rate differential has narrowed a little. According to Yamada, the yen being undervalued will not be a factor until the short-term Japan-US interest rate differential falls below at least the 3% level. For instance, even if interest rate differentials in the 5% range stop falling at the 4% level, it is difficult to correct the yen’s depreciation.

Closing Thoughts

It's clear that Japan's bond market is facing significant challenges, and the BOJ's next moves will be crucial in determining the future of the market and the yen. It's a delicate balancing act that requires careful maneuvering. What are your thoughts on this situation? Do you think the BOJ's actions will be enough to stabilize the market and the yen? Share your thoughts and discuss with your friends. Don't forget to sign up for the Daily Briefing, which is delivered every day at 6pm.