The swap market anticipates an increase in the possibility that the Bank of Japan will raise interest rates in July, and the yield on Japan's benchmark treasury bonds has risen to the level when Haruhiko Kuroda began implementing aggressive monetary easing policies.
Against the backdrop of market expectations that the Bank of Japan will work to normalize interest rates and support the strengthening of the yen, Japan's benchmark treasury bond yield climbed to its highest level since 2013.
On Monday, the yield on Japan's 10-year treasury bonds reached a high of 0.981%, reaching the level when former Bank of Japan Governor Haruhiko Kuroda began implementing aggressive monetary easing.
Today, under the leadership of successor Kazuo Ueda, Japan's 10-year treasury yield is approaching the much-anticipated 1% mark, far from the deep negative value of 2020. The yield on Japan's 20-30 year treasury bonds also climbed to the highest level in a decade, encouraging Japanese investors to invest more in the domestic bond market rather than the US and European markets.
Investors are taking a close look at data and policymakers' statements to try to predict the Bank of Japan's next move. The overnight index swap market anticipates a 57% chance that the Bank of Japan will raise interest rates in July, compared to about 50% in early May.
Pacific Investment Management Co. (Pacific Investment Management Co.) anticipates that the Bank of Japan may raise interest rates three more times this year. Ales Koutny, head of international interest rates at Vanguard Group Inc. (Vanguard Group Inc.), predicts that the Bank of Japan's policy interest rate will reach around 0.75% by the end of this year.
Contrary to the views of Pacific Investment Management and Pioneer Group, Lianbo Holdings (AB) said last week that the Bank of Japan may prefer to reduce its huge balance sheet rather than raise interest rates.
How the Bank of Japan adjusts its debt purchase plan is also important to the money market, because the huge yield gap between Japan and the rest of the world has caused the yen to fall to a new low in 34 years against the US dollar.
Western Asset Management Co. (Western Asset Management Co.) is betting that since the Bank of Japan is unlikely to cut its ultra-long-term debt holdings, the 30-year Japanese Treasury yield will not rise as much as short-term bonds. Hiroyuki Kimura, head of investment management in Japan, said in an interview last week that the demand for ultra-long-term bonds by life insurance companies and other institutions should also prevent yields from rising too much.
Western Asset Management is a subsidiary of US fund giant Franklin Templeton (Franklin Templeton), which expects the Bank of Japan to raise interest rates again this year, most likely in the fall. By the end of March, Western Asset Management had managed assets of approximately US$385.4 billion.
At the beginning of last week, the Bank of Japan unexpectedly cut the number of bonds it purchased during regular operations, and yields on some Japanese sovereign bonds soared to the highest level in a decade. Life insurance companies regard 10-year treasury bonds and 30-year treasury bonds as the main investment targets. The yield gap between the two widened to about 110 basis points, close to the highest level since January last year. The Bank of Japan has always been a major buyer of 5- to 10-year treasury bonds, and fewer bonds with a longer term are purchased, so reducing ultra-long-term bonds is a low priority.
As for the benchmark 10-year treasury bond yield, Kimura said, “This yield will rise as the Bank of Japan gradually raises interest rates, but it will not significantly exceed 1%.” On the other hand, he doesn't expect the yield on 30-year treasury bonds to break through 2%, causing the yield curve to flatten by about 10-20 basis points.
Kimura said that Bank of Japan Governor Kazuo Ueda has made it clear that reducing purchases of Japanese treasury bonds is unrelated to monetary policy measures, which means “the Bank of Japan will try to communicate with the market to avoid any accidents.” He said that the Bank of Japan is unlikely to suddenly cut monthly purchases from 6 trillion yen to 5 trillion yen (32 billion US dollars) in June or July, and the Bank of Japan will reduce its holdings in a cautious manner.
Also, he believes that the Bank of Japan still needs to see more economic data to determine when it can raise interest rates again, so the July meeting is too early.
According to the first-quarter GDP data released on May 16, the decline in private consumption expenditure exceeded expectations, indicating weak domestic demand. “Although nominally the economy is growing, the economy is essentially weak,” Kimura said.
The key is whether the Bank of Japan can clearly see the virtuous cycle of rising wages and prices and recovering consumption by the fall. At that time, it will release economic indicators for July and August reflecting the impact of wage negotiations. Western Asset Management predicts that positive data will cause the Bank of Japan to raise interest rates by 15 basis points.