TOKYO -- Long-term Japanese government debt yields stopped falling this month after declining steeply from February to April, as market players became convinced that the Bank of Japan will not pile on with further monetary easing measures until the dust settles with its controversial negative interest rate policy.
Banks and life insurers actively purchased Japanese government bonds right after the central bank announced its negative rate policy in late January, but their appetite for the bonds has since dwindled. JGB traders at securities firms have noticed a lack of active buyers. While foreigners are still in the market, their buying is not sizable enough to drive interest rates sharply lower. As a result, yields on newly issued 10-year JGBs have floated aimlessly around minus 0.1%, dramatically easing fears of future volatility.
Though this change owes partly to rising U.S. long-term rates, waning expectations of further monetary easing by the BOJ play a larger role.
Easing has had a clear effect on interest rates, Deputy Gov. Hiroshi Nakaso said in a speech Monday, illustrating the point with a chart showing a decline in long-term interest rates. While acknowledging that some weakness remains in the economy, Nakaso made no mention of any need for more easing.
"I will keep a watchful eye on how the negative interest rate policy, through the further decline in interest rates following its introduction, will work through the economy," he said.
A similar stance can be seen in the summary of opinions from the central bank's April policy meeting, released May 12. This paints a clear difference from when the central bank announced the negative rate policy, since the bank noted then that it "will cut the interest rate further into negative territory if judged as necessary."
More potent than expected
Even the BOJ may not have expected interest rates to fall so far, said Tomoya Masanao of investment management firm Pimco. Though the central bank imposed negative rates on some of the funds financial institutions park at the bank, the change in rates amounted to just 0.2 percentage point. Yet in the three months since the decision, yields on 20-year and 40-year bonds dropped nearly 0.7 point and 1 point, respectively.
Some BOJ officials admitted that the impact was larger than expected. This may have reduced the need for language about cutting rates further.
The view that monetary easing is hitting its limit has also gained ground again. Policy board members expressed concern at the April meeting that distortions in price formation and limits to the central bank's bond buying are growing increasingly evident.
If the BOJ loosens policy further with interest rates as low as they are, it runs a higher risk that bond auctions will be undersubscribed.
Though inflation is sluggish, trends have somewhat shifted in the central bank's favor. A resurgence of speculation that the U.S. Federal Reserve will raise interest rates has stemmed the yen's rise against the dollar. Crude oil prices have turned upward as well.
Markets are gradually accounting for the growing likelihood that the BOJ will remain in a wait-and-see mode, barring another global shock.