Bank of Japan to increase bond issuance
2023.01.18 12:02
Bank of Japan to increase bond issuance
By Kristina Sobol
Budrigannews.com – Investors who are now bracing themselves for fresh chaos in bond markets and wild currency swings believe that a significant policy shift by Japan’s central bank is still a matter of when rather than if.
In defiance of market expectations that it would phase out its massive stimulus program in response to rising inflationary pressure, the Bank of Japan maintained extremely low interest rates on Wednesday, including a bond yield cap that it was having difficulty defending.
Given that Japanese inflation is at 41-year highs and the cost of keeping borrowing costs low rises, analysts assert that a change in policy is inevitable at some point.
Cosimo Marasciulo, head of fixed income absolute return at Amundi, Europe’s largest fund manager, stated, “Although the timing is uncertain, we are not changing our view, this is something that has to happen at some point.”
Amundi remained poised for rising Japanese government bond yields (JGBs) and strengthening of the yen, he added.
OTC: BNP Paribas said on Wednesday that it was betting on a rise in the yen and that it expected the BOJ to increase the target range for the 10-year yield in March from 0.5% to 1% above or below zero.
On Wednesday, Japan’s 10-year bond yield, which is currently at 0.4%, decreased, but it is still within striking distance of its all-time high.
Investors now have to adjust to a possible sustained decrease in Japanese demand for global bonds due to the fact that expectations of higher yields are luring cash back home. At a time when major central banks have begun selling bonds they own as part of their efforts to tighten monetary policy and government debt sales have surged, that is a risk that some believe is underestimated.
Including Japan’s $1 trillion reserve portfolio, institutional investors in Japan held a total of $3 trillion worth of foreign bonds at their peak. They are estimated to remain well above $2 trillion, despite their recent downward trend.
These flows are significant for nearly $70 trillion worth of sovereign bond markets because Japanese investors are the largest foreign holders of U.S. Treasuries and among the largest foreign buyers of debt in countries like Australia and France.
Simon Edelsten, Artemis’ global equity manager, stated, “The scary thing about Japanese (monetary) policy discussions is the numbers are absolutely enormous.” Therefore, you must pay attention to any direction you take.
Japanese investors are well aware of the repercussions of a possible end to ultra-low interest rates and higher inflation. They wouldn’t have to send their money overseas in search of a return for the first time in years.
Analysts stated that investors would suffer significant losses if foreign bonds were sold quickly.
However, in anticipation of a change, Japanese investors sold foreign bonds for a net $15.94 billion in December, marking the fourth consecutive month of selling.
According to Brad Setser, a senior fellow at the Council on Foreign Relations, it is not an exaggeration to assert that over the course of the past ten years, Japanese flows have had at least as much of an effect on the global bond market as Chinese flows.
According to Canada Life Asset Management fund manager David Arnaud, U.S. Treasuries and French bonds are susceptible.
Over $1 trillion, or just over 4% of the $24 trillion market, is held by Japanese U.S. Treasury securities.
According to UBS, Japanese investors own at least 10% of the 2.3 trillion euro ($2.45 trillion) worth of French sovereign bonds and about A$260 billion ($181.14 billion), or about 19% of the debt in Australia.
After the BOJ’s decision, the yen fell by more than 2% at first, but then it rose because it was expected that Japan would move away from its extremely loose policy, which some say they expect to happen when BOJ chief Haruhiko Kuroda resigns in April.
In March, Kuroda’s last meeting, no one is sure who will take over as governor.
Legal & General Investment Management’s head of rates and inflation strategy Christopher Jeffery stated, “What they’re doing with yield curve control is not long-term sustainable.”
According to LGIM calculations, the BoJ has purchased yield curve controls worth the equivalent of $264 billion since December 1.
Another obstacle for investors is that volatility in the $7.5 trillion a day foreign exchange markets is unlikely to go away soon due to a further rise in the yen, which is one of the most popular trades in 2023.
Since October, the yen has already increased by nearly 18%.
According to Kit Juckes, chief global foreign exchange strategist at Societe Generale (OTC:), “there are a lot of people willing to take a bet that the yen goes significantly further.”
But analysts said that increased volatility could help the safe-haven dollar, making it harder to tell what a BOJ change would mean for major currencies.
Last but not least, global stocks could suffer further losses.
Nomura says that over the past ten years, Japanese investors have bought much more foreign and global stocks than domestic stocks.
From January 2013 to November 2022, global equity investment trusts sold in Japan received net inflows of more than 14 trillion yen, according to Nomura. However, it predicts that Japan will have significantly less interest in investing local currency in overseas funds in the future.
