On the 20th of last month, the Bank of Japan unexpectedly revised its monetary easing measures and raised the upper limit of the fluctuation range of long-term interest rates.
Governor Kuroda emphasized at a news conference that the BOJ was not raising interest rates or tightening monetary policy, but the market did not take it that way.
Due to the speculation that the Bank of Japan will be forced to make further policy revisions, the bond market on the 13th has strengthened the movement to sell government bonds, and the long-term interest rate has risen to 0.545%.
It surpassed the 0.5% upper limit raised by the Bank of Japan last month for the first time.
What kind of world does the market see in the future?
I interviewed.
(Economics Department reporter Koki Nishizono)
Why the sudden policy change?
Why did the Bank of Japan change its policy in the first place?
Governor Kuroda said at a press conference, "To improve market functioning and promote the formation of a smoother yield curve overall," and "to ensure that the effects of monetary easing are smoothly applied to corporate finance." I explained it, but I don't really understand if it's just this.
Looking at the "Main Opinions" announced on December 28, at the meeting, the Policy Board members said that "the price formation of 10-year government bonds is distorted" and "the functioning of the bond market has deteriorated." If it continues, it could adversely affect the environment for corporate bond issuance, etc., and hinder the spread of the effects of monetary easing."
In short, they believed that the side effects of YCC (yield curve control) could no longer be ignored, and that unless they were corrected, the effects of monetary policy would be affected.
What is the "distortion" of the market?
So what is the policy board member's "distortion in the price formation of government bonds"?
Until then, the Bank of Japan had kept long-term interest rates (yield on 10-year government bonds) below 0.25% by buying large amounts of government bonds.
However, due to successive interest rate hikes in Europe and the United States, upward pressure on long-term interest rates increased in Japan as well, and the yield curve as of December was shaped like the figure below.
Yield curve is a curve that shows the yield of short-term government bonds to long-term government bonds, and usually the longer the term, the higher the yield.
If you look at the yield curve at that time, you can see that only the 10-year government bond yield was unnaturally depressed and distorted.
The 10-year government bond yield is used as the benchmark for various transactions such as corporate bonds, so if things continue as they are, companies will not be able to determine the appropriate interest rate level when issuing corporate bonds. Isn't there?
This is why the Bank of Japan raised the fluctuation range of interest rates.
However, at the October meeting, which preceded December, all committee members expressed their recognition that ``a yield curve consistent with the policy for money market operations had been formed,'' and strong concerns about market distortions were conspicuous. The market took this decision as sudden.
“Distortion” still remains
The introduction has become quite long, but from here I will introduce the market view.
When I interviewed 10 people involved in the bond market, including analysts, about the Bank of Japan's policy revision this time, all of them showed the recognition that "from the market's point of view, the revision of the fluctuation range is effectively an interest rate hike."
Of these, Mizuho Securities Chief Bond Strategist Tanji Tanji said, "Even if the upper limit was raised, the market would push for the next correction, and the BOJ could naturally assume that the distortion of the yield curve would not be corrected. It should be,” he points out.
What does it mean if the distortion is not corrected?
The chart below shows the current shape of the yield curve.
In the bond market on the 13th, the movement to sell government bonds strengthened, and the long-term interest rate rose to 0.545%.
It surpassed the 0.5% upper limit raised by the Bank of Japan last month for the first time.
However, the "distortion" remains, with yields falling below those of government bonds with maturities of 7 to 9 years and an unnatural drop at 10 years.
How should we look at the current state of the yield curve, which remains distorted?
Izuru Kato, chief economist at Totan Research, said, "The sudden move to the YCC cap in December has left the market skeptical that another correction will follow. The BOJ has a planned exit policy as the first step. "Even if we didn't mean it as a step, the market will come to interpret that YCC is approaching its limits, or that it's the beginning of the end."
Overseas players take a stance of selling Japanese government bonds
This trend can also be seen in the trading data of foreign investors.
According to the Foreign and Domestic Securities Investment Report released by the Ministry of Finance on January 4, foreign investors significantly invested in Japanese medium- to long-term bonds during the week from December 18 to December 24, including the Bank of Japan's policy revisions. It's oversold.
The amount is more than 4.8 trillion yen, more than 10 times larger than the previous week.
If the BOJ changes its policy, long-term interest rates will rise and government bond prices will fall.
In anticipation of that, I will sell Japanese government bonds.
Statistics show that the number of overseas investors who think in this way is increasing.
Elimination of negative interest rates?
The market has priced in further.
The market is paying attention to the data of "OIS" (Overnight Index Swap).
OIS is one of the transactions called "interest rate swaps" in which a fixed interest rate and a floating interest rate are exchanged for a certain period of time.
For floating interest rates, refer to "Uncollateralized Overnight Call Interest Rates".
The "Uncollateralized Overnight Call Rate" is a representative short-term interest rate indicator for the call market, a market in which many financial institutions lend and borrow money, and fluctuates daily.
The fixed interest rate that is exchanged for this is also called the OIS rate, and is the interest rate that is determined in advance for each repayment period when financial institutions lend and borrow money.
When deciding on this interest rate, each financial institution predicts what the BOJ's policy interest rate will be based on various analyses, so to speak, predicts the level of the interest rate, and from this the market decides how the BOJ's interest rate will be. You can see what you're looking at.
This graph is based on this data.
Looking at the data, following the policy revision in December last year, interest rates calculated based on the OIS rate rose sharply across a wide range of maturities.
We also factor in the view that the average overnight interest rate, smoothed over one month, will exceed 0.5% over the next two years.
Tanji, chief bond strategist at Mizuho Securities, said, "The market is not only pricing in the cancellation of negative interest rates, but also the possibility of further interest rate hikes. The OIS is an indicator that has many overseas participants and many speculators. However, it may be difficult to eliminate the distortion in the yield curve as the market increasingly factors in the BOJ's policy first and foremost."
What about super long-term bonds?
On the other hand, we also asked about the market's views on government bonds with maturities longer than 10 years, so-called "ultra-long-term bonds."
Many of the government bonds with maturities over 10 years are purchased by life insurance companies.
When I asked investment managers at four major life insurance companies, Nippon Life Insurance, Dai-ichi Life Insurance, Meiji Yasuda Life Insurance, and Sumitomo Life Insurance, they all expressed the view that the interest rate level will rise, albeit by a small amount.
A person in charge of a major life insurance company said, "Because the Bank of Japan is expected to make further policy revisions, we expect ultra-long-term interest rates to move upward. However, we, who have been watching the bond market for a long time, have also seen interest rates rise in Japan. I've never experienced a rising phase.I'm pulling out management materials from more than 30 years ago from the warehouse and studying the situation at that time while considering future management policies." .
In fact, companies are accelerating the shift from foreign bonds to domestic bonds.
What will the Bank of Japan do?
The world that the market sees in the future is one in which interest rates rise over the short to very long term.
However, the Bank of Japan maintains that the revision is just a part of monetary easing.
As a result, there is a big gap between the BOJ's explanation and the market's "expectation".
Monetary policy meetings will be held on January 17th and 18th, but how will the BOJ face the market?
Is there a next move?
What to do Bank of Japan!
Trends in interest rates will also affect housing loans and loans to companies, so we will continue to pay attention to the battle between the BOJ and the market over government bonds and interest rates.
Next week's plan
Next week, the 17th (Tuesday), Keidanren's basic policy will be announced as a guideline for management in this year's spring labor offensive.
Given the recent rise in prices, attention will be paid to what kind of stance they will take regarding wage increases.
On Wednesday, June 18, the Bank of Japan will hold a monetary policy meeting, followed by Governor Kuroda's press conference.
Including this one, there will be two more press conferences after the decision-making meeting that Governor Kuroda will hold during his term.
Market interest is focused on whether there will be any “surprises” like the previous one regarding monetary policy.
Furthermore, the Ministry of Internal Affairs and Communications is scheduled to announce the consumer price index on Friday, 20th.
While there is a view that it will reach the 4% level, how far prices will rise is also a focus.