The Bank of Japan vs. Speculators

Ichiro Suzuki The Bank of Japan was under pressure in recent weeks. Some speculators began to believe that the BOJ’s ability to cap 10-year government bond yield at 0.25% (25 basis points) was increasingly at risk. The BOJ calls this policy ‘yield curve control’. It intends to hold the long end of the curve at 25 bps amid growing inflationary pressure that tends to lift long-term interest rates. Landscape of interest rates has changed considerably around the world over the last 18 months, when it became obvious that the coronavirus does not take global economy into a deep recession. At the outset of 2021, 10-year Treasury notes still yielded less than 1%, and it reached 3% since then. German bunds today yield at approximately half the level of U.S. Treasury securities though they were stuck at the same level as Japan not so long ago. JGB’s yield has risen a stunning 0.25% that was unthinkable when they were below zero at the height of deflationary worries. In order to hold long-term rates at 0.25%, the BOJ keeps buying JGBs in the market. In order to beat the central bank, speculators’ selling has to beat the BOJ’s buying. They’ve almost got it in mid-June as the yield rose a touch above 0.25%. Nonetheless, they have failed to break the barrier decisively, and it retreated to 0.23% by the end of June. Hedge funds’ attack on the BOJ reminded market participants of the 1992 assault by George Soros on the British pound that was at that time widely considered as immensely overvalued. Mr. Soros was so convinced of the GBP’s overvaluation that he attacked it with full-fledged short positions, and beat the Bank of England. Maybe, fundamentals on Japanese government bonds were not yet as fragile as speculators thought they were on the pound 30 years ago. The BOJ is able to defend their positions due primarily to persistently robust external positions. Crude oil prices’ recent surge has driven Japan’s current account into deficits. However, such a dent doesn’t seem to be sufficient to drive JGB’s yield above where the BOJ want it to be. The country remains the largest holder of U.S. Treasury securities, ahead of China. It takes more than dipping into deficit positions in the current account. The deficits would probably have to be chronic to take the bond market down sharply. However, Japan is not there yet, at least for now. If not this time, speculators would still get it right sometime down the road. Japanese politicians are currently in the middle of campaigning for the House of Councillors (the upper house) election on July 10. No one is talking about reining in expenditure, and everyone is shouting about more subsidies on gasoline or food prices, greater spending on welfare or defense to expand the already world’s largest accumulated debt further. There is no end in sight on this ever growing public sector debt though it was brought up to a dizzying 263% of GDP in 2021, up from 236% in 2020. Speculators didn’t get it this time, but time is on their side except that they might have to wait longer than they can.


About the author: Mr. Suzuki is a retired banking executive based in Tokyo, Japan.