The Short View

May 14, 2013 7:14 pm

‘Spiking’ Japanese bonds yields recall days of 2003

The 10-year yield has almost doubled since last month’s low

The FT style guide insists “spike” can be used only for a price move that goes up and back down again. Perhaps this is what Haruhiko Kuroda, Bank of Japan governor, had in mind when he said at the weekend there was no risk of Japanese bond yields spiking.

More likely he was just wrong. Since Friday, 10-year Japanese yields have had their biggest three-day rise since 2003 – the last time Japan was serious about tackling deflation. The 10-year yield has now almost doubled from last month’s low, similar to the initial rise from an almost identical low a decade ago.

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There are other parallels with 2003. A new central bank governor made much of working with the government and vastly increased bond purchases. Ministers acted too, although what was then a record currency intervention by any country has been replaced with public spending this time.

If the parallels continue, bondholders will suffer a lot more pain. After initially doubling, in 2003 yields doubled again in the next two months as investors worried about inflation (deflation makes even puny bond yields look more attractive in real terms). In the end prices rose for only one month in 2003, and they stayed flat until commodities took off in 2007.

The big difference this time is that the yen has collapsed, falling yesterday to its weakest in five years against the dollar, below Y102. Energy imports are more expensive, so inflation looks much more likely – though it has yet to show up in official data.

That fall in the yen means foreign owners of Japanese bonds are hurting badly. Domestic bondholders have lost about 1 per cent since December’s election. Dollar-based investors without a yen hedge are down about a fifth.

The good news for Mr Kuroda is that rising yields suggest investors are starting to believe he will succeed in beating deflation. If they truly buy the story, yields have a lot further to rise.

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