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Economy

Japan seen left out of global exit from easy money

US, Europe and even Australia riding the tide of higher bond yields

The Bank of Japan is increasingly purchasing Japanese government bonds to control yields.

TOKYO -- Yields on long-term government bonds are climbing across the world as major central banks signal an end to the era of easy money, possibly leaving the Bank of Japan fighting a lonely battle against deflation.

German long-term rates topped 0.49% early Monday to reach the highest level in roughly three and a half months. Long-dated U.S. Treasurys reached a one-and-a-half-month high of 2.3%.

European Central Bank President Mario Draghi sparked the trend by hinting at an early reversal of ultraloose policy. "The threat of deflation is gone," he said June 27. Bank of England Gov. Mark Carney soon followed, indicating a possible rate hike in the U.K.

Speculation that Europe is following in the footsteps of the U.S. by pulling back from monetary easing quickly spread among investors. Although Europe and Japan both languish amid weak inflation rates, growth in the manufacturing sector in the eurozone is giving the ECB room for tightening.

Rising yields are reaching other parts of the world. In Australia, long-term interest rates have surged since June 27 to hit a one-and-a-half-month peak Monday.

"Even in Australia, where a rate hike did not seem imminent amid low inflation rates, speculation about tightening is growing," said Teppei Ino, analyst at Bank of Tokyo-Mitsubishi UFJ. "The tides may be shifting a bit in the global financial markets."

The impact is even starting to hit long-term rates in Japan, which had been essentially static. The market was so quiet that there was no trading of 10-year Japanese government bonds on June 29. The next day, the yield responded to activity in the West by briefly inching up to 0.085% -- the highest point in three and a half months at the time.

But observers see that the jump in JGB yields as only temporary, even as they predict sustainable upward pressure on global rates. "High-volume sales at low prices [or high yields] would still attract numerous buy orders," a representative at a Japanese brokerage said of last week's bond market.

The BOJ is keen on maintaining its policy of capping long-term interest rates at around zero for the foreseeable future. If long rates shoot up too high, the central bank will get them under control by purchasing every bond in auctions at set yields.

"If interest rates approach 0.08% for 10-year bonds, or 0.6% for 20-year bonds, investors will be more likely to jump in," said Hideto Nagamatsu, an executive officer at SMBC Friend Securities.

Should Japan continue to lag behind the rest of the world in raising rates, it could find itself unable to raise rates in the next recession, making normalized rates elusive. The BOJ could go deeper into negative territory if a financial crisis erupted, as a senior official points out, but its massive asset purchases are reaching their limits. 

If the BOJ fails to get on the exit train with the rest of the world, it could become stuck in a cycle of endless easing.

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