TOKYO -- Japanese long-term interest rates have turned unstable as market predictions of a continuing decline prove unfounded.
The benchmark yield on newly issued 10-year Japanese government bonds ticked up 7 basis points to a roughly 20-month high of 0.355% Tuesday, reflecting a lackluster auction of new debt the same day. Only two weeks earlier, the yield had dropped to an all-time low of 0.195%.
The Ministry of Finance's sale of 10-year JGBs drew 5.8 trillion yen ($49.3 billion) in bids, the lowest take in 18 months. Fewer investors seem willing to pay high prices for them.
Ten-year JGBs subsequently sold off in the secondary market. The ructions in bonds rippled into equities, with the Nikkei Stock Average dropping 1.27% to close below 17,500 for the first time in about a week.
"Monetary easing by the Bank of Japan continues to support the stock market, but we can expect more jitters as long as interest rates remain unstable," says Yoshinori Shigemi of J.P. Morgan Asset Management.
Some of the downward pressure on JGBs owed to diminished hopes that the BOJ will increase its money-supplying bond purchases. The central bank slashed its inflation outlook for fiscal 2015 last month, but Gov. Haruhiko Kuroda said that this move was prompted by falling crude oil prices and that no additional measures were needed.
The BOJ is buying huge amounts of Japanese government debt as part of a ramped-up quantitative easing program that began nearly two years ago. Institutional investors have profited from this by buying JGBs at auction and flipping them to the central bank. But with the prospect of an increase in BOJ purchases fading, there is less incentive for this trade. Hence the weak demand at the finance ministry's bond sale Tuesday.
Meanwhile, crude oil prices, whose rapid decline has kept inflation in check, seem to be leveling out. Should inflation turn upward again, long-term interest rates can be expected to follow. Nomura Securities' Naka Matsuzawa figures that 0.195% will prove the 10-year yield's lowest point this year.
With the European Central Bank embarking on quantitative easing, Japan's outlier position in the global bond market is shifting. German bunds replaced JGBs on Tuesday as the lowest-yielding 10-year sovereign debt among advanced economies.