FILE PHOTO: Bank of Japan Governor Kazuo Ueda speaks at a group interview with media in Tokyo, Japan, May 25, 2023. REUTERS/Kim Kyung-Hoon/File Photo
Tokyo: Japan’s era of negative interest rates will end in coming months, and the implications for world markets will be enormous, with US Treasuries set to suffer the most, according to the latest Bloomberg Markets Live Pulse (MLIV) survey.
The Bank of Japan (BoJ) is likely to unwind its unusual policy of sub-zero rates during the first half of 2024, the majority of 315 respondents said. The move would bring an end to a bold experiment it embarked on in 2016 – one that’s recently placed Japan at odds with other major central banks that have been tightening aggressively to combat inflation.
What the BoJ does, and when it does it, will reverberate through world markets. The biggest consequence, according to MLIV Pulse respondents: more turbulence for the vast amount of US Treasuries. That’s because higher yields in Japan would encourage fund repatriation by Japanese investors whose huge holdings include US, European and Australian debt.
“A shift in the BoJ’s policy could slow the export of capital from Japan as yields become more attractive locally than they were before,” said Martin Whetton, head of financial markets strategy at Westpac Banking Corp in Sydney.
Thirty-seven per cent of participants said US Treasuries will face the most severe impact from governor Kazuo Ueda shifting away from super-accommodative policy. Declines in the US dollar may add to the misery, as 36% expect pain for the currency that the US debt is denominated in.
Portfolio managers and central banks around the world are keeping a watchful eye on any move by the BoJ, which has made negative rates and yield curve control the cornerstone of its policy to fight stagnant prices. It rocked global markets by raising the cap on benchmark 10-year bond yields in late 2022, and again at the end of July, pushing up bond yields.
“Some form of normalisation is probably necessary,” said Eugene Leow, a senior rates strategist at DBS Bank Ltd. “This could mean upward pressure on five to 10-year developed-market yields as higher Japanese government bond yields spill over.”
Japanese investors are the biggest foreign holders of US government bonds, with more than US$1.1 trillion at the end of August, according to data from the US Treasury Department. Life insurers dumped a net 196 billion yen of foreign bonds in the April to September period, following a record eight trillion yen of sales in the previous six months, according to Finance Ministry data.
The MLIV Pulse survey shows that 61% of respondents expect global bond market volatility to increase when the BoJ changes the policy, with the majority of respondents predicting the historic step will happen next year.
“The market will probably be very jittery until traders and investors will get used to a world with positive yields,” said Ayako Sera, a market strategist in Tokyo at Sumitomo Mitsui Trust Bank Ltd.
“It’s like a big stone being thrown into a pond where there has been no wind.”
US Treasuries, traditionally the pillar of stability in many saving and investment portfolios, are already more volatile than stocks, at least by one measure.
The combination of the aggressive policy tightening by the US Federal Reserve and the flood of bond sales by the US government have imposed historical losses, especially on long-duration debt. — Bloomberg
