‘Trump Trade’ ramps up pressure on the Bank of Japan

A Trump-induced headache for the Bank of Japan.

The global sell-off in government bonds has pushed Japan’s 10-year bond yield above an unofficial 0.1 per cent cap for the first time since policymakers unveiled their new form of “yield curve control” back in September.

Benchmark Japanese bonds yields have now climbed from an all-time low of -0.09 per cent just before the US presidential election to close at 0.116 per cent on Thursday – a 12 month high (see chart above).

Japanese policymakers adopted a new approach to their stimulus measures last year, promising to carry out unlimited bond purchases to ensure the 10-year yield stays around 0 per cent in a bid to banish deflation and revive growth in the world’s third largest economy.

But the global Trump-driven dumping of government debt – on the back of expectations of rising inflation – is putting the squeeze on the BoJ and raising fresh questions about its commitment to near unlimited monetary stimulus.

Policymakers responded this morning by announcing an unscheduled purchasing of five to 10 year bonds in unlimited quantities.

Emily Nicol, at Daiwa Capital Markets, said the decision showed the BoJ was resorting to its “emergency policy tool kit” in a bid to reassert its yield curve control policy.

The intervention seems to have done the trick, with 10-year JGB yields falling back to around 0.099 per cent at publication time from a daily high of 0.155 per cent.

Yet, despite evidence the BoJ is sticking to its new framework for now, minutes from the central bank’s latest policy meeting revealed doubts within the BoJ about the suitability of the current yield cap.

The BoJ’s January’s minutes revealed:

Some in the market believe that the BoJ wants to guide the 10-year bond yield at a range of minus 0.1 percent and plus 0.1 percent. But it would be inappropriate to set such uniform standards.

But Mikihiro Matsuoka, chief Japan economist at Deutsche Bank, thinks the BoJ will not risk a hit to its credibility by shifting the parameters of the yield curve control policy, describing the effect from climbing US treasury yields as “transitory”.

“Once the rise in the US yields ends, JGB yields face a downward force from the rising ‘stock’ of government debt held by the BoJ”, Mr Matsuoka said.

Takuji Aida at Soc Gen is also dismissive of market concerns the BoJ could move towards a “tapering”, noting that core inflation is only expected to accelerate to 1 per cent this year.

“[Tapering] would only increase the upward pressure on yields, a move that would be contrary to the BoJ’s objectives”, said Mr Aida.

“The focus for the BoJ in 2017 will be to create an environment in which it could start to raise its long-term target rate before Governor Kuroda’s term expires in April 2018″.