The fluctuation range of the 10-year government bond yield has doubled. Is Japan’s monetary policy about to shift?
On December 20, the Bank of Japan unexpectedly announced that it will continue to maintain the yield of Japan’s 10-year government bonds at -0.1%, but will double the fluctuation range of this yield from the original ±0.25 to ±0.5 . Since Japan’s 10-year government bond yield is the benchmark interest rate of its currency, this means that Japan’s benchmark interest rate has a large room for interest rate hikes in the future. Although the Bank of Japan announced that this is due to the need to smooth the yields of government bonds of different maturities, it is not to exit the loose monetary policy. However, in the context of the Fed and the world‘s major central banks continuing to raise interest rates, the market is still worried that this is a signal of Japan’s monetary policy shift: Japan will follow major Western countries into the channel of interest rate hikes next year.
In this regard, the author’s opinion is that this is essentially an expectation management strategy. The Bank of Japan may not enter the channel of raising interest rates in a short period of time, but it will have an impact on investors’ expectations, thereby improving the flexibility of monetary policy to a certain extent. sex. The main reason is: due to the long-term application of the ultra-loose monetary policy, the market expectations are too stable, making Japan’s monetary policy hard to return, and it is facing rigid consequences that are difficult to normalize.
In order to get rid of the economic downturn, Japan has implemented a loose monetary policy of “zero interest rate” since 1999. After Shinzo Abe came to power in 2012, he implemented “Abenomics” which mainly focused on stimulus policies. The Bank of Japan further carried out quantitative easing policies on the basis of zero interest rates, but the economy still did not improve significantly. Therefore, in 2016, the current Governor of the Bank of Japan, Haruhiko Kuroda, introduced the “quantitative easing policy under negative interest rates”, announcing that the benchmark interest rate will be set at -0.1%, and learning from the Federal Reserve’s practice to control the fluctuation of the 10-year government bond yield by buying and selling government bonds This is achieved within a smaller range of ±0.25. Since then, this policy has been maintained until now.
Although this policy had a certain positive impact on stimulating long-term investment and encouraging exports, it also brought about two unavoidable consequences:
One is to mobilize the enthusiasm of ordinary people in Japan to invest and buy houses, and greatly increase the scale of floating rate mortgage loans. Due to the implementation of negative interest rates, Japan’s floating rate mortgage interest rate is only 0.3%, which is much lower than the 1.5% interest rate of 35-period fixed rate mortgage loans, which makes nearly 70% of the current outstanding housing loans in Japan are floating rate mortgage loans. While these loans did stabilize Japanese real estate, house prices have risen a total of 57.6% from 2012 to 2021. In recent years, under the economic downturn and the impact of the epidemic, the income of ordinary people has declined. If interest rates are raised, vulnerable lenders will be severely hit, which will affect the asset quality of commercial banks and form financial risks. Therefore, we can only continue to maintain this level of interest rates.
The second is to mobilize the enthusiasm of various investors to carry out interest rate spread arbitrage on the yen, resulting in a huge scale of Japanese capital export. Since the interest rate of the yen is 2-3 percentage points lower than the interest rate of the international financial market for a long time, this provides room for arbitrage trading: investors borrow yen at a lower interest rate, then convert it into US dollars or other foreign currencies, and buy the yield Higher US or European national bonds can obtain stable spread income. In particular, when a large amount of funds participate in this transaction, the yen will be devalued in the foreign exchange market, so that the exchange rate difference income during the investment period can be obtained. This makes yen spread arbitrage trading a simple and risk-free ideal investment method, which not only attracts professional investment institutions, but also attracts a large number of Japanese retail investors to participate in it. These retail investors are mainly Japanese housewives, so they are also called “Mrs. Watanabe”, similar to the golden aunt in my country. Due to the large number of participants, according to relevant data from the Bank for International Settlements, it is estimated that the yen arbitrage funds have reached 1 trillion US dollars, which is close to one-fifth of Japan’s GDP. Although the depreciation of the yen by these arbitrage funds is beneficial to promoting Japan’s exports, it has largely been proved that Japan’s quantitative easing monetary policy cannot better stimulate the domestic economy.
Therefore, when the Bank of Japan announced to maintain the negative interest rate unchanged, but expanded the range of volatility, it first affected the expectations of interest rate arbitrage investors, and they no longer considered yen interest rate arbitrage as a risk-free investment. Therefore, we can see that after the Bank of Japan announced the above-mentioned policy, there was a sell-off of U.S. debt in the international financial market, which caused the price of U.S. debt to fall and the yield to rise. The yield of the 10-year government bond rose by nearly 11 basis points to 3.692%. The 30-year government bond yield rose 12 basis points to 3.745%. At the same time, some arbitrage capital flowed back to Japan, which caused the yen to appreciate by 4.1496% against the US dollar to 131.2 yen to 1 US dollar.
On the other hand, in order to stabilize the expectations of the domestic mortgage lenders, the Bank of Japan, while announcing the expansion of the range of interest rate fluctuations, also promised to significantly increase the purchase scale of 10-year government bonds per month, from the currently planned 7.3 trillion yen to 9 trillion yen, continue to maintain its ultra-loose monetary policy.
In the short term, the expected management effect of this policy is quite obvious. But in the long run, Japan’s monetary policy has to take a difficult turn due to the high inflationary pressure.
Author/Wang Yong (Tsinghua University)
Editor / Yue Caizhou
Proofreading / Zhao Lin
