Another spike in global government bond yields could be the outcome, reducing investor appetite for riskier assets such as stocks. A similar scenario unfolded in late July when adjustments to the BOJ’s yield-curve control program caused a sudden increase in US Treasury yields and dampened the US stock market rally.
The BOJ’s policy change, which eased restrictions on the maximum yield for Japanese 10-year notes, reinforced expectations that the central bank is moving away from its ultra-loose monetary policy. Analysts fear that rising Japanese yields might prompt domestic investors to sell their large holdings of US Treasuries and redirect their investments within Japan, resulting in higher yields globally. Currently, however, Japanese yields are constrained by the yield-curve control policy.
The BOJ has announced that it will purchase Japanese government bonds with a 10-year maturity at a rate of 1%, relaxing the previous cap of 0.5%. Analysts suggest that the BOJ could buy bonds anywhere between 0.5% and 1%. As of Wednesday, the 10-year JGB yield stood at 0.63%.
Regardless of China’s woes, it is crucial to keep a close eye on Japan as its weakening yen and government debt may require substantial interventions from the BOJ and the Ministry of Finance. If market expectations shift towards a more aggressive BOJ monetary policy, it could potentially result in a surge in global government bond yields, discouraging investors from taking risks. The BOJ’s recent change in policy regarding Japanese 10-year notes has raised concerns that rising yields may lead Japanese investors to divest from US Treasuries in favor of domestic investments. However, the BOJ’s yield-curve control policy currently limits Japanese yields. The BOJ has indicated that it will relax the cap on the maximum yield, allowing for more flexibility. Currently, the 10-year JGB yield is at 0.63%.
The Rise in Bond Yields Undercuts the Yen
Analysts have noted that the Bank of Japan’s (BOJ) monetary policy comments have caused bond yields outside the country to rise, thereby affecting the value of the yen. This week, the yield on the 10-year U.S. Treasury note (BX:TMUBMUSD10Y) reached above 4.25%, its highest level since last fall.
While the yen initially saw a surge in value following adjustments made to yield-curve control last month, this increase was short-lived. Traders remain primarily focused on the persistently negative short-term interest rates, and therefore expected the yen’s strength to be limited by these factors.
The yen (USDJPY, +0.40%) has traded at more than 145 per U.S. dollar this week, its weakest level since early November. Dollar bulls are hesitant to push the dollar/yen pair beyond 145, possibly due to concerns about BOJ intervention.
Marc Chandler, chief market strategist at Bannockburn Global Forex, stated that if intervention is seen as an “escalation ladder,” Japanese officials have started climbing that ladder. He also noted that both the exchange rate and the 10-year Japanese Government Bond (JGB) are nearing levels that prompted BOJ intervention in September last year.
Japan’s Finance Minister, Shunichi Suzuki, expressed his vigilance over the foreign exchange market and emphasized that “appropriate action” would be taken if there were excessive moves, according to news reports.
In other news, U.S. stocks experienced modest declines on Wednesday, with the Dow Jones Industrial Average (DJIA) dropping 20 points (or 0.1%), the S&P 500 (SPX) falling 0.2%, and the Nasdaq Composite (COMP) slumping 0.6%. Despite rallying throughout 2023, stocks have encountered setbacks in August, partly influenced by the rise in Treasury yields. At the end of July, the S&P 500 experienced a 3.4% pullback, while the Dow declined by 1.7% and the Nasdaq dropped by 5.4%.
