TOKYO -- Suggestive remarks by the Bank of Japan in its latest monetary policy statement sent the country's long-term interest rates to the highest level in about five weeks.
On Friday, the central bank said it would conduct a "comprehensive assessment" of its quantitative and qualitative monetary easing in September -- fueling speculation that the BOJ may not cut deposit rates further into negative territory or boost purchases of Japanese government bonds anymore.
Yields on Japanese government bonds rose across the board, on everything from two-year bonds to those maturing in 40 years. The yield on benchmark newly issued 10-year JGBs shot up as much as 6.5 basis points to minus 0.13% -- ending the day at minus 0.145%. That is the highest since June 23, when Britain voted to leave the European Union, and marks a jump from the minus 0.295% last Wednesday -- the day before the BOJ conducted its two-day policy meeting for July.
Furthermore, if the BOJ were to pull back on easing measures focused on interest rates and money market operations, investors may no longer be able to resell their JGB holdings to the central bank at a profit. This would negate the point of buying JGBs at negative yields, thereby driving buyers away.
For the time being, many observers expect long-term interest rates to hover around minus 0.1% -- the BOJ's deposit interest rate on some funds. But if demand is sluggish at the Tuesday auction of JGBs, long-term rates may rise further.
Meanwhile, in the stock market, the BOJ's decision not to further lower deposit rates sent banking stocks surging Monday. Resona Holdings, for instance, rose 7%.
"Those who had shorted [bank stocks] and medium- to long-term investors that had sold bank shareholdings turned to buying," says an official at a major Japanese securities brokerage.
The banking industry subindex of the Nikkei Stock Average is now up 10% over two sessions, far outperforming the overall index's 1% rise.
The BOJ's plan to nearly double purchases of exchange-traded funds to around 6 trillion yen ($58.6 billion) a year spurred expectations that banking stocks will benefit, said Masahiro Ichikawa of Sumitomo Mitsui Asset Management. Hisao Matsuura of Nomura Securities said the step will push the Nikkei average up by around 2,000 points over the next year.
But with the earnings environment remaining harsh for banks, the stocks are unlikely to keep climbing, said Nana Otsuki of online brokerage Monex.