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22 May 2013
Flash: Sharp rise in JGB yields despite BOJ easing is cause for concern - Nomura
FXstreet.com (Barcelona) - Richard Koo, Chief Economist at the Nomura Research Institute notes that the rise in Japanese government bond yields that began a week ago last Friday has been attributed to a number of factors.
He feels that of primary concern is the fact that it happened at a time when the BOJ was buying large quantities of government bonds and notes that until the recent events there was an expectation in the JGB market that bond prices would not fall substantially even if the Bank’s aggressive easing program depressed the yen and lifted inflation expectations as long as the BOJ remained a major buyer. Further, he adds that the BOJ also argued that, like its counterparts in the US and the UK, it was trying to prop up the economy by lowering long-term interest rates with the purchase of longer-term JGBs.
However, Koo continues to comment that when the Bank actually started buying these bonds in quantity, interest rates did not fall and in fact, they rose, with the initial rise in rates in the 5-year portion of the curve pushing even mortgage rates higher. He writes, “This was initially attributed to poor management of operations by the BOJ where it failed to inform its intentions at the short end of the market. But the events beginning a week ago last Friday occurred in the long-term sector and showed that even large-scale BOJ purchases of JGBs cannot stop yields from rising.”
He feels that of primary concern is the fact that it happened at a time when the BOJ was buying large quantities of government bonds and notes that until the recent events there was an expectation in the JGB market that bond prices would not fall substantially even if the Bank’s aggressive easing program depressed the yen and lifted inflation expectations as long as the BOJ remained a major buyer. Further, he adds that the BOJ also argued that, like its counterparts in the US and the UK, it was trying to prop up the economy by lowering long-term interest rates with the purchase of longer-term JGBs.
However, Koo continues to comment that when the Bank actually started buying these bonds in quantity, interest rates did not fall and in fact, they rose, with the initial rise in rates in the 5-year portion of the curve pushing even mortgage rates higher. He writes, “This was initially attributed to poor management of operations by the BOJ where it failed to inform its intentions at the short end of the market. But the events beginning a week ago last Friday occurred in the long-term sector and showed that even large-scale BOJ purchases of JGBs cannot stop yields from rising.”