Japan’s Latest Challenge: Rising Bond Yields

May 22nd, 2013 at 9:44 pm

Some facts about the impact of Japan’s aggressive stimulus program to inject $1.4 trillion into the economy over the next two years:

Real GDP up: 3.5% in Q1, beating expectations (which hasn’t happened much there for a long while…)

Equities up: the Nikkei is up 88% from its 2012 low; bank stocks have about doubled;

Yen down about 16% against the dollar; 26% from its 2012 high;

Government bond yields up (?!): the 10-year JGB (Japanese government bond), while still below 1%, has doubled since the stimulus was announced in early April.

It’s that last one that should catch your attention.  It’s unusual, potentially problematic, and bears close watching.  As Bloomberg noted today:

The biggest surge in government debt yields in five years threatens to undermine the BOJ’s stimulus, with companies…pulling bond sales amid the tumult. The prospects of a growth rebound and the emergence of inflation has contributed to sending the rate on 10-year bonds up more than a quarter percentage point in two weeks.

The American pattern for stocks and bond yields right now, shown towards the end of the figure below, is more like what you might expect in a period where the underlying economy is still weak and the central bank is pumping serious cash into the system ($85 bn/month in the US case through “quantitative easing”).  Equities are rallying on high corporate profits, low costs, and expectations of future growth, while Treasury yields are low in keeping with the Fed’s monetary stimulus.

On the other hand, the climbing yields on JGBs is worrisome on three counts.  First, the central bank wants a low and stable cost of borrowing to get investors back in the game.  Second, higher yields on government bonds make it pricier to service the large stock of Japanese public debt, and third, reducing bond yields and volatility adds another ball to the juggling act in which Japan’s economic officials are engaged.

The BOJ’s governor, Haruhiko Kuroda, told the press he had it covered: the bank would conduct their bond purchases in a “flexible manner” to get the yields down and under control.  OK, but that there is some fine tuning amidst a lot of moving parts.  Perhaps what’s happening with yields is no more than temporary hiccup, where the anticipation of growth and inflation are generating a whiff of something that hasn’t been in the Japanese air for many a year: hope, confidence, and the sense that policy makers are truly committed to reflating the long moribund economy.

At any rate, stay tuned.

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7 comments in reply to "Japan’s Latest Challenge: Rising Bond Yields"

  1. Tom in MN says:

    Doesn’t Japan’s situation make more sense than ours? Stocks are rising so people sell (or don’t buy) bonds (dropping the price and increasing the rate) to buy stocks. This shows confidence that Abenomics is going to succeed. The BOJ can indeed buy bonds to support their price. Stocks and bonds (values) are supposed to move in opposite directions. What does not make sense is the US with both stocks and bonds rising due to people being so scared they will buy US bonds with negative real yields, which just like the excess bank reserves, partially defeats the FED’s QE. To me this shows a lack of confidence in our recovery. It’s going to be very interesting to see how lift off from zero rates here plays out. Maybe Japan will show us what it looks like first.


  2. Frank Somatra says:

    The most intuitive answer to the bond question to me is that the markets now believe that the Bank of Japan can realistically hit its (much higher than before) inflation target and are incorporating their inflation expectations into their decisions to buy long term government debt. Does Japan have an equivalent of TIPS that we can use to measure a market expectations for inflation?


  3. foosion says:

    Higher yields due to higher growth shouldn’t hurt borrowers, because higher growth means they have more money with which to service the debt (which they should have, in the aggregate).

    Higher yields due to higher inflation shouldn’t hurt borrowers, so long as their revenue increases (which it should, in the aggregate).

    I don’t see a problem.


  4. smith says:

    Krugman blogged this morning about what he thought drove the Nikkei down 7% yesterday and attendant implications for their bond market and the Japanese economy as a whole. He dismisses the latest movement in bond markets as too small for concern, and points to just the opposite concern that could be driving movement in stock prices.

    “3. Fears about the resolution of the Bank of Japan, its willingness to persist in very expansionary monetary policy for a long time.” http://krugman.blogs.nytimes.com/2013/05/23/elementary-my-dear-watanabe-san-somewhat-wonkish/

    Or it could signify nothing (he leads with too).


    • Jared Bernstein says:

      I’d guess this isn’t a lasting problem–as I suggested at the end of the piece, more like a hiccup as expectations reset. But bears [sic] watching.


  5. Perplexed says:

    So, given the sheer size of Japan’s debt, an increase in rates would reduce it pretty quickly then wouldn’t it? Maybe its not such bad news on net after all? After all the heat they’ve been taking about it, it would be pretty amazing if they bought it back at a relatively small fraction of what they borrowed wouldn’t it?


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