Business Recorder
TOKYO: Long-term Japanese government bond yields are likely headed for a three-decade peak of 3%, analysts and investors say, as inflationary pressures from the Iran war spur expectations for more aggressive Bank of Japan policy tightening. Benchmark 10-year JGB yields topped 2.6% on Thursday for the first time since May 1997, amid a rising tide for bond yields globally as the conflict in the Middle East lifts energy and commodity prices. As an energy importer, Japan is particularly vulnerable to those inflationary forces - a fact that is compounded by a stubbornly weak yen, despite intervention by Japanese officials to strengthen it. Yields rise when bond prices fall. If high oil prices and a weak yen persist, the top end for the BOJ’s projected neutral long-term interest rate - a level that neither stimulates nor slows economic growth - “already risks shifting up to around 3%,” said a portfolio manager at a domestic bank, from an upper limit of 2.5% in the central bank’s own projections in March. That makes JGBs “hard to buy unless long-term rates rise to the high 2% or near 3%,” the portfolio manager said. A market gauge of the expected terminal short-term interest rate for the BOJ’s current tightening cycle surpassed 2% this week, according to NLI Research Institute’s head of financial research, Yuki Fukumoto, referring to the levels where these rates may settle. By comparison, the yield on two-year JGBs - the tenor most sensitive to policy expectations - stands at less than 1.4%, and the record high for five-year yields reached this week was 1.945%, suggesting yields have further to rise. For the 10-year yield, “3% will likely become a key target level,” Fukumoto said. BOJ communications have leaned hawkish recently, including the summary of opinions from the April meeting released Tuesday, but concerns that the BOJ is behind the curve linger, which could mean a rush to tighten policy later. Nomura Securities fixed-income strategist Mari Iwashita said she has the impression central bank policymakers are conscious of upside inflation risks and are leaning toward responding with rate hikes, but may face resistance from Prime Minister Sanae Takaichi. “The government also seems to have strong views, and whether the BOJ can gain its understanding is the focal point,” she said, adding that she is watching for whether Takaichi and BOJ Governor Kazuo Ueda will meet in late May to exchange policy views, after meetings in February and November. Investors have deep-rooted concerns about an expansion of fiscal policy, made clear after a solid 10-year JGB auction on Tuesday saw little follow-through buying in the secondary market, said Keisuke Tsuruta, senior fixed-income strategist at Mitsubishi UFJ Morgan Stanley Securities. “It suggests that market participants are once again adopting a cautious stance,” he said. If the government goes ahead with a promised suspension of the consumption tax on food, and a supplementary budget emerges to combat high prices, “a 3% long-term yield will come into sight,” Tsuruta added.
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