Japanese bond yields rise amid worries about government strategy

Jack Duffy | FlashRatings | Monday, September 12, 2016 7:15 PM EDT
Japanese government bond yields rose to the highest levels in nearly six months on Monday on concerns that the Bank of Japan could begin reducing its monetary easing when it meets for a comprehensive policy review on Sept. 20-21.

The yield on the 10-year benchmark Japanese government bond rose to -0.002% on Monday, nearly pushing into positive territory for the first time since February. Investors are worried that the BOJ will begin cutting back on purchases long-term government bonds as part of a strategy shift in its battle to boost inflation.

The worries in Japan have been compounded by jitters that the European Central Bank and the U.S. Federal Reserve are also giving their super-low-rate policies a rethink. ECB President Mario Draghi said the ECB Governing Council did not even discuss extending its bond-buying program at its meeting last week, while Fed officials have been increasingly calling for rates to rise in the near-term.

Analysts offered mixed views on whether the current bout of market weakness will last or whether it is just a “tantrum” that will pass.

Kazuhiko Sano, chief bond strategist at Tokai Tokyo Securities, told Bloomberg News that the market turmoil stems from a “misunderstanding” of what the BOJ is doing and that there is likely to be “no tapering” of bond purchases in the near-term. He is forecasting that 10-year Japanese yields will fall back to as low as -0.40%.

But Jun Fukashiro, head of fixed-income at Sumitomo Mitsui Asset Management, told Reuters that uncertainty is driving investors to the sidelines and that sales of new securities, like the auction of 20-year Japanese government bonds scheduled for later this week, will result in higher rates.

“Given the market anxiety over the BOJ, few would be ready to buy at the auction, especially around current yield levels,” Fukashiro said.