For years, Japan’s giant government bond market has slumbered on the edges of global finance. Dominated by the country’s central bank, prices rarely budge, leaving traders with little to do.
But at the start of this month, a sale of 10-year debt failed to stir the usual interest from investors in the ¥1.1 quadrillion ($10.3tn) market. Unnerved by new plans at the central bank to shift to buying more shorter-term debt, some private buyers stayed away, making it the worst auction in terms of demand since 2016.
Japanese government bonds, JGBS, stumbled, sending ripples through other markets including US Treasuries and even, briefly, UK gilts.
Behind the drop in demand was a rethink by economists and investors about the next steps for the Bank of Japan ahead of its meeting on October 31, as policymakers fret about the health of the global and domestic economy.
One option for the BOJ is simply to cut interest rates and accept the dent to profitability at the nation’s commercial banks, which have chafed against further easing measures. Alternatively, the BOJ could go further with its rejig of bond purchases. Analysts are increasingly shifting towards the second view and bracing themselves for what could be one of the central bank’s most market-moving meetings in recent years.
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A graphic with no description “JGBS remain in the eye of the storm and will continue to influence the direction of global rates,” said Priya Misra, head of global rates strategy at TD Securities. Poor economic data and a rise in the country’s consumption tax are likely to keep propping up debt prices, she said.
Still, the lacklustre auction on October 1 reflected expectations that the BOJ could pull back more forcefully on its massive purchases of long-term JGBS, which have underpinned the past six years of market action.
Its aim is to push long-term debt yields further above short-term interest rates — an effect known as steepening the yield curve that is crucial to the health of the country’s banking system and the returns of its massive public sector pension fund.
The ensuing sell-off demonstrated markets’ acute sensitivity to central banks’ support. But its fleeting nature highlights the challenge the BOJ faces in pushing up longer-term yields in a world where investors are anticipating rock-bottom interest rates — in Japan and beyond — as far as the eye can see.
The BOJ tweak came on the same day as a rise in the country’s consumption tax that many economists expect will knock the fragile growth of the Japanese economy.
Last week, fresh data showed a sharp jump in department store sales in September. But traders and analysts were not encouraged, instead taking the data as evidence that consumers rushed to the shops to bring forward their purchases of big-ticket items ahead of the longdelayed rise in VAT from 8 per cent to 10 per cent on most goods. Data on supermarket turnover from the first week of October was none too encouraging, either.
Some economists fear that the tax rise could be burdensome enough to push the world’s thirdbiggest economy into a technical recession.
