Macroscope | Banking crisis gives Bank of Japan a chance to gently raise bond rates

Japan needs to wind up its expensive bond-buying programme and a weakened currency is the easiest way to inflate the problem away

Expect a managed rise in the dollar-yen rate, with the 10-year bond yield likely to rise to 1 per cent by mid-2025

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A woman walks in front of a cheap izakaya in Tokyo, Japan, on March 24. The BOJ cannot keep bond yields low and stop the currency from depreciating at the same time. Allowing the currency to weaken will inflate the problem away, and Japan wants inflation anyway. Photo: Reuters

Published: 3:45pm, 28 Mar 2023

Earlier this month, Kazuo Ueda was formally approved by the Diet as the new governor of the Bank of Japan to take over after a decade of Haruhiko Kuroda at the helm and almost 20 years of zero interest rates.

The BOJ has also been keeping the 10-year government bond yield near zero, only allowing a controlled rise to 0.5 per cent last December. In defending this cap and committing to bond-buying, the central bank now holds more than half of all government bonds – which has led to the market betting against them.

In a statistical anomaly, it actually owns more than 100 per cent of some 10-year bonds: buying the same bond twice, as some of the securities it lends get sold back. With few natural bond buyers at these low yields, the government is running a huge deficit.

Rising yields elsewhere adds pressure but the government cannot afford to let 10-year yields rise too high when debt servicing is already over 30 per cent of government receipts. If yields were to rise to 2 per cent for a few years, debt servicing would be over 50 per cent, with a massive mark-to-market loss on the BOJ’s balance sheet.

The situation is also affecting the currency, with the dollar-yen rate weakening from 115 a year ago to over 150 last October. When the BOJ eventually intervened last December, allowing bond yields to rise to 0.5 per cent, it got lucky as global yields topped out around the same time.

But it is impossible to keep yields low and stop the currency from depreciating at the same time – the BOJ will have to choose.

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.css-1m2rp1p{color:#34b8b5;}Macroscope | Banking crisis gives Bank of Japan a chance to gently raise bond rates

Macroscope | Banking crisis gives Bank of Japan a chance to gently raise bond rates