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The Bank of Japan has kept its overnight call rate target at 0.50% since January, but speculation of another rate hike to 0.75% this summer, have already been factored into the Tokyo money markets. BOJ chief Toshihiko Fukui suggested that the central bank would raise rates gradually, and is undeterred by a low consumer price index. “If markets expect the BOJ to keep rates low even while the economy achieves 2.4% growth, it could distort the BOJ’s policy scenario. We need to adjust interest rates despite near-term weak price growth, if we can confirm that long-term price moves are strong and the economy and prices are heading towards a good direction," Fukui told a news conference on May 10th. Referring to “yen carry” positions worldwide, “If people have a fixed idea that interest rates are going to stay low for a long time regardless of economic conditions, it could lead to a buildup of extreme positions in financial and capital markets and distribution of resources to inefficient economic activities,” he added.
Since mid-March, Japan’s 2-year note yield has ratcheted upward by 25 basis points to 1%, its highest in a decade, fully pricing in a BoJ quarter-point rate hike to 0.75% as early as July or August. Fukui has been sending verbal signals to the Japanese bond market, that it’s okay to raise rates gradually. But once the yield on the 2-year note hit 1%, in classic fashion, the Japanese ministry of finance sent signals to bond traders that the rate rise had gone far enough for now. “Excessive rises in interest rates could have a negative impact on the economic recovery, so they are not desirable,” said Japanese deputy Finance Minister Hideto Fujii on June 7th. He jawboned the JGB market after Japan’s benchmark 10-year government bond yield briefly rose to 1.90%, a 10-month high. Japanese bond traders have almost absolute allegiance to the finance ministry, and usually obey orders on command. The rise in Japanese 2-year yields has stalled the dollar upward momentum at 122-yen, since the Federal Reserve can’t match a BoJ rate hike. Japan’s powerful FX chief Hiroshi Watanabe said increases in global bond yields are a natural move, including those in Japan, and not a big concern. “When looking at current market conditions they seem to reflect in a relatively accurate way the state of Japan’s real economy.” While higher bond yields would increase the cost of funding Japan’s huge 7.5 trillion yen public debt, “Authorities shouldn’t steer markets toward being too pessimistic about Japan’s economic conditions,” he said.
The Bank of Japan has kept global bond yields depressed with its super easy money policy. But in this latest episode, it was the ECB’s rate hike campaign that initially led the German bund yield to break-out above its Inflection point, followed by higher Aussie, US Treasury, and finally higher Japanese bond yields. If Japanese and US T-Note yields move above their August 2006 highs, it could signal a major upsurge in long-term global bond yields, wreaking havoc on stock markets. To read more on this subject, click on my previous Financial Sense article, here.
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