Financial experts see bond interest rates rising in Japan: Bank of Japan adjusts monetary policy and signals turnaround

Financial experts see bond interest rates rising in Japan: Bank of Japan adjusts monetary policy and signals turnaround

According to a report from www.nzz.ch, the Bank of Japan (BoJ) has decided to slightly correct its monetary policy, thereby signaling its willingness to turn interest rates. The BoJ has overhauled yield controls for 10-year Japanese government bonds, maintaining the zero percent yield target but increasing the official cap to one percent from one. At the same time, the BoJ is sticking to negative interest rates for short-term bonds. The change in monetary policy is seen as an important adjustment by the new central bank chief Kazuo Ueda and marks a gradual departure from Japan's exceptional monetary policy path. The yield on 10-year Japanese government bonds was 0.8 percent in recent days, while it was 4.893 percent on American bonds.

This change in monetary policy may have an impact on the market and the financial industry. The interest rate turnaround in Japan could lead to investors increasingly betting on rising long-term interest rates. This could result in the BoJ having to buy more government bonds to defend its interest rate cap. At the same time, the widening interest rate differential between Japan and other countries could further weaken the value of the Japanese yen and increase inflationary pressures. To protect the yen, the Japanese Finance Ministry could intervene in the foreign exchange market.

Japan's life insurers, which are among the top buyers of government bonds, show that they expect the BoJ to abandon yield curve control and negative interest rate policies from April 2024, according to a study by Bank of America Securities in Tokyo. Some insurers even believe that a turnaround in interest rates is possible during the current financial year. Experts say this signals that life insurers are well prepared and the BoJ could re-examine its monetary policy.

However, there are also challenges for the BoJ when it comes to a turnaround in interest rates. The falling yen threatens to further fuel inflation, while interest rate hikes could slow the economic recovery. In addition, the scope for interest rate increases is limited because the Japanese debt ratio is over 260 percent.

The changes in monetary policy also have an impact on the bond market. Investors are increasingly betting on an earlier interest rate turnaround, which is leading to rising long-term interest rates. Hedge funds see Japan as an attractive market and expect higher structural volatility. The weaker yen strengthens the competitiveness of exporters and can increase foreign sales and profits of large corporations.

The central bank itself has increased its forecast for growth and inflation. The BoJ now expects growth of 2 percent for the current fiscal year 2024, while the estimate for non-food price increases has been raised from 2.5 to 2.8 percent for 2023 and from 1.9 to 2.8 percent for 2024. Companies are willing to pass on higher purchasing prices to their customers, which indicates rising inflation. However, the BoJ does not expect core inflation to decline until 2025.

Overall, it appears that the Bank of Japan's monetary policy changes could potentially lead to a turnaround in interest rates and higher inflation. However, the impact on the market and the financial industry depends on various factors, including the development of the Japanese yen, the debt ratio and the economic recovery.