Japan’s 10-year government bond yield climbed above 1 percent on Wednesday for the first time in 11 years as investors braced for higher borrowing costs as part of the central bank’s historic policy shift. In recent weeks, investors have increased their bets that the Bank of Japan (BoJ) will lift interest rates further and begin to reduce its purchases of government debt after it ended eight years of negative rates in March.
BoJ’s policy shift and market reaction
Benchmark 10-year borrowing costs in Asia’s largest advanced economy rose as high as 1.005 percent on Wednesday, a level not seen since May 2013. The yield has risen steadily since May 13 when the BoJ surprised markets by buying a smaller than expected amount of five- to 10-year Japanese government bonds during its regular operation.
Central Bank’s balancing act
The central bank in March abandoned its policy of using purchases to cap 10-year borrowing costs, but has continued to buy government debt to avoid causing shocks to financial markets. Governor Kazuo Ueda has previously said the central bank had no immediate plans to change the size of its bond purchases. But the BoJ has come under pressure to tighten its policy to arrest a slide in the yen to a 34-year low, even as Japanese authorities are thought to have conducted multiple interventions to prop up the currency.
Kaoru Shoji, a rates strategist at SMBC Nikko Securities, said the recent rise in long-term debt yields was a sign of the BoJ loosening its grip on bond markets after spending years capping yields at zero. “There is concern that the BoJ will reduce its bond purchases at a faster pace than expected and that is likely to be the main driver for the rise in yields,” Shoji said.
Gradual shrinking of BoJ’s bond portfolio
While the BoJ may buy bonds in smaller quantities, it is unlikely to suspend asset purchases altogether or even begin selling assets. Instead, officials think they can rely on bonds that they hold maturing to gradually shrink the central bank’s vast portfolio.
In a report earlier this month, Goldman Sachs said it expected the BoJ to raise its policy rate to 1.5 percent by 2027 and 10-year bond yields to reach 2 percent by the end of 2026.
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