MNI POLICY:BOJ Still Sees JGB Yields In Line With Fundamentals
MNI (LONDON) - Bank of Japan officials remain confident that the rapid increase in government bond yields reflects fundamentals and will not impede a moderate economic recovery, but they are also increasingly mindful about the effect of rising interest payments on government finances, MNI understands.
The 10-year JGB yield briefly touched 1.575% on Monday, the highest level since October 2008, as strong wage data increased speculation over early rate hikes by the BOJ. While the yield has almost doubled from levels near 0.8% last October, officials so far see no sign of speculative trading which would warrant intervention, and see yields moving towards the 2% level close to that predicted by the government for the 2025 fiscal year.
Officials consider that the rise in yields partly reflects higher rates in other developed markets, as well as a dip in bond buying as investors avoid posting unrealised losses ahead of the end of Japan’s fiscal year on March 31. (See MNI POLICY: BOJ Shrugs Off JGB Yields, Yen Strength)
NEUTRAL DRIFT
Solid economic and prices data have led investors to increase their estimate of the peak of the BOJ’s tightening cycle to 1.5% from 1.0%, which is the lower end of the range of the Bank staff’s estimate of the neutral interest rate.
The BOJ has raised its policy rate to 0.5% from -0.1% in early 2024, and the chances of another 25-basis-point hike at the April 30-May 1 meeting will hinge on whether officials detect increased inflation risks in the Tankan survey on April 1, reports from the Bank’s branch managers' meeting on April 7, the updated wage survey by union confederation Rengo in April, and CPI data.
While officials see steady wage increases as a necessary precondition for achieving its 2% inflation target, further rate hikes will also require signs that higher pay is feeding through to prices.
Japan’s long-term interest rates have been depressed by about 100 basis points due to the stock effect of the BOJ’s huge bond holdings, according to BOJ analysis.