2023-07-31 00:15:00
The lesson of history is that interest rates rise suddenly and sharply…
Bank of Japan Governor Kazuo Ueda holds a press conference after the Monetary Policy Meeting, which decided to revise monetary easing, on July 28. (Photo: Kyodo News)
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The Bank of Japan revised its monetary easing policy. It is believed that this was due to the improvement of the Bank of Japan’s balance sheet and the avoidance of the risk of a sharp rise in government bond yields due to the postponement.
The question is to what extent investors will tolerate higher yields in the future. Yield changes over the past decade suggest that 0.30% per year would be within the expected range.
However, there are fewer cases of gradual rise in interest rates than cases of gradual decline in interest rates. The ability of the Bank of Japan is being questioned.
(Kenichi Hirayama: Chief Strategist, Tokio Marine Asset Management)
Contributing to the improvement of the Bank of Japan’s balance sheet
On July 28, 2023, the Bank of Japan (BOJ) decided to introduce flexibility in its yield curve control policy (a policy that controls not only the policy interest rate that the Bank of Japan has traditionally targeted in its monetary policy, but also the levels of short- and long-term interest rates in general; hereafter YCC). decided to convert The 10-year government bond yield will be capped at 0.5%, but a rise of up to 1.0% will be tolerated. The Bank of Japan will not drop the flag of 0.0% ± 0.5%, but it will surely become a mere formality.
Under its previous policy, the Bank of Japan would have had to purchase a large amount of government bonds with yields as low as 0.5% from the market in order to curb the rise in long-term interest rates. However, from now on, it will be possible to respond flexibly until it reaches 1.0%. Therefore, in the future, it is expected to have the effect of increasing the average yield of government bonds held by the Bank of Japan.
Policy flexibility was also called for by the Bank of Japan’s balance sheet.
Current long-term government bond yields held by the Bank of Japan average less than 0.3%. Rather than always buying government bonds at the 0.5% level to keep them within the YCC range, it is better to flexibly purchase government bonds up to 1.0% and the average yield of the government bonds held will rise.
The Bank of Japan, which holds the majority of the outstanding Japanese government bonds, would like to avoid further expansion of its balance sheet.
Furthermore, for the Bank of Japan, which is holding its breath every fiscal year with the distributions of ETFs (exchange-traded funds) it owns, increasing the yield on its holdings is the most important issue.
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