FxWirePro: BoJ successfully maintains 10-year JGB yields at zero, difficult to sustain amid global bond rout

The Bank of Japan (BoJ) has succeeded in maintaining the 10-year Japanese government bond yields at around zero percent, although we foresee this to be unsustainable at this level in the medium-term amid a situation of global rout in the debt market. The benchmark 10-year bond yield, which moves inversely to its price, hovered around 0.05 percent since December 22, 2016.

The BoJ introduced its new monetary framework of QQE with Yield Curve Control (YCC) in September last year. So far the new regime has worked a treat, as not long after this announcement, most sovereign bonds sold off largely owing to rising global inflation and to a lesser extent, better expectations for global growth (or at the very least, less worries about downside risks).

The introduction of the YCC component to the central bank’s monetary regime made policy there very pro-cyclical. If Japan’s inflation increases, then real long-term rates will decline (as the 10-year rate is fixed).

Despite the BoJ Governor Haruhiko Kuroda’s latest speech on Monday, which reinforced the central bank’s view to maintain QQE with yield curve control for as long as needed to achieve 2 percent inflation in a stable manner, we still speculate that amid lack of positive global cues, this commitment seems unreachable.

The JGBs have been closely following developments in the U.S. debt market. The yields on 10-year Treasury surged to highest in 2016 after Republican candidate Donald Trump won the United States 2016 Presidential election. Also, backed by Trump’s fiscal policies, Treasuries witnessed a massive sell-off post-election result, sending 10-year yields higher by 50 basis points, which in turn, create a cloudy outlook for the BoJ to control JGB yields near zero.

Lastly, the BoJ’s first two-day monetary policy meeting for 2017 will take place on January 30-31. We foresee that the central will remain committed to hold its 10-year JGB yields near zero, while keeping interest rate steady at -0.10 percent.

Meanwhile, the benchmark Nikkei 225 ended 1.48 percent lower at 18,813, while at 8:00GMT, the FxWirePro's Hourly Yen Strength Index remained slightly bullish at 80.53 (a reading above +75 indicates a bullish trend, while that below -75 a bearish trend). For more details, visit http://www.fxwirepro.com/currencyindex