BOJ may rattle global
bond markets as Fed seen on hold
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[September 20, 2016]
By Richard Leong and Vidya Ranganathan
NEW YORK/SINGAPORE (Reuters) - The Bank
of Japan may steal the thunder from the U.S. Federal Reserve and its
chair Janet Yellen this week if it chooses to give more monetary
stimulus in its latest effort to jumpstart its economy and the U.S.
central bank decides to stand pat on interest rates.
If the BOJ, led by Governor Haruhiko Kuroda, decides to shake up its
policy stance, one avenue would be to be less aggressive in
purchasing longer-dated assets, thereby allowing yields to go up,
while cutting short-term rates deeper into negative territory.
This would likely result in a rise in yields of U.S. Treasuries and
other government bonds, and on the margin push uplong-term borrowing
costs for consumers and corporations.
Japanese investors have poured money into foreign bonds in a
scramble for income-generating assets as domestic bond yield shave
turned negative. This is contributing to holding global yields near
historically low levels.
"The BOJ is important in part because the Japanese have been buying
anything abroad that gives them yields," said David Keeble, global
head of interest rates strategy at Credit Agricole Corporate &
Investment Bank in New York.
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Last week, the yield on 10-year Japanese government debt rose close
to zero percent, a level not seen since March, in aglobal bond
market sell-off triggered by the European Central Bank's decision to
refrain from expanding its asset purchase program on Sept. 8.
The ECB's move intensified worries that major central banks are
running out of tools to aid their economies.
"Japan has struck a chord in terms of the generalised perception
that there isn't that much left in that tank for policymakers from a
monetary standpoint," said Charlie Diebel, head of rates at
London-based asset manager Aviva Investors.
"Therefore, if you still need to provide stimulus, perhaps monetary
policy isn't the way it is going to be forthcoming,"
The U.S. economy is far from robust, posting a sub-par 1.2percent
increase in second quarter gross domestic product. However, Japan,
the world's third-biggest economy, is struggling even more, eking
out just 0.7 percent growth in the same period.
The BOJ will undertake a comprehensive review of its monetary policy
at its Sept. 20-21 meeting, and there is speculation it may lower
short-term interest rates deeper into negative territory and change
its bond purchasing program.
Fed Chair Yellen and other U.S. policy-makers, who will convene
during the same period as their Japanese counterparts, are widely
expected to leave their benchmark policy rate unchanged in a range
of 0.25-0.50 percent. They will likely keep the door open for a rate
increase by year-end.
To be sure, if the Fed stuns investors by raising rates within hours
of their Japanese counterparts' decision, that would overshadow
anything coming from Tokyo.
The consensus is the Fed will keep its powder dry given the recent
patch of soft economic data. Also, it may be reluctant to raise
rates, and possibly upset financial markets, ahead of a tightening
presidential election on Nov. 8.
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![](../images/092016pics/busine53.jpg)
A revolving light is seen in front of Bank of Japan (BOJ) buildings
in Tokyo, June 24, 2015. REUTERS/Toru Hanai/File Photo
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ONE FOOT OUT THE DOOR
Japan's struggle has persisted even as the BOJ adopted
unconventional measures of negative interest rates and massive asset
purchases aimed at spurring consumption and investments, while also
helping exports with a weaker yen.
Instead the yen has risen 15 percent against the dollar<JPY=> and 13 percent
versus the euro <EURJPY=> so far this year. Bond curves globally have meanwhile
steepened, led by a rise in Japanese long-term yields, in the past couple of
weeks.
"If you think about the last 15-20 years, we always thought Japan was the
outlier. In fact, it turned out they were pretty much the leader," said Ashley
Perrott, head of Asian fixed income at UBS Asset Management in Singapore.
"The rest of the world has followed the Japan path to lower yields. And I think
they are still probably leading," he said.
The BOJ's ability to communicate its intent is therefore key, and some analysts
even suspect the confusion heading into Wednesday's meeting is intentional,
aimed at upsetting the single-bet mentality in the market and thus limit any
fallout.
Interest rate markets implied traders expect a 17 percent chance the BOJ would
lower its target rate to -0.30 percent onWednesday and a 14 percent chance the
Fed would raise the federal funds rate by a quarter point, according to Reuters
data.
Real money and leveraged investors are therefore playing it extremely safe.
Perrott, whose team manages $3 billion in its Asian portfolios, has cut back on
interest rate exposure, while still holding derivatives that will protect UBS
should bond markets rally once again.
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"It is a wild card and will definitely see markets move," Scott Mather, chief
investment officer of U.S. Core Strategies and a managing director at the $1.5
trillion Pacific Investment Management Co (PIMCO), referring to the BOJ.
"We are relatively neutral on the government-bond market and we don’t have a
large position to our risk exposure in Japan. Definitely, investors are coming
up to the sense that the effect of monetary stimulus is not as advertised.”
(Additional reporting by Trevor Hunnicutt and Jennifer Ablan in NEW YORK,
Fransiska Nangoy in JAKARTA, John Geddie in LONDON, Hideyuki Sano in TOKYO;
Editing by Daniel Bases, Chizu Nomiyama and Kim Coghill)
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