Dear clients,
While bond investors are betting that the BOJ will change its much-discussed yield curve control policy, they still see new governor Kazuo Ueda sticking to negative rates for now.
Benchmark 2-year government bond yields have fallen since mid-January, while 10-year yields remained at the 0.5% target set by the Bank of Japan.
The central bank has set an interest rate of minus 0.1% on the portion of deposits that commercial banks hold at the Bank of Japan since January 2016. This policy tool has helped keep two- and five-year yields flat, but the BOJ’s 10-year yield cap forces it to make unprecedented debt purchases and risks exacerbating market distortions, an issue that the monetary authority says prompted it to take decision to double the yield ceiling in December.
Ueda’s previous actions also confirm rumors that he may be in no hurry to reverse his negative rate policy. He voted against abandoning the zero rate policy when he was a board member of the Bank of Japan in August 2000.
Strong demand for Japan’s five-year bonds at Thursday’s auction also suggests that investors are not particularly worried about the end of the policy of negative interest rates. On sale, the cut-off price was higher than expected, and the demand-to-coverage ratio rose sharply, which is an indication of investor interest.
In the currency market, traders see a peak in perceived volatility around the time of current Governor Haruhiko Kuroda’s last political meeting in March, and then a decline until Ueda’s first meeting in April.
