Investors in Japan’s bond market are bracing for turbulence that has the potential to test the Bank of Japan’s yield target in the lead up to next week’s policy decision.
(Bloomberg) — Investors in Japan’s bond market are bracing for turbulence that has the potential to test the Bank of Japan’s yield target in the lead up to next week’s policy decision.
Option-implied volatility of Japan’s 10-year bond futures climbed to the highest since April on Friday, according to data from Japan Exchange Group Inc. The yen’s one-week implied volatility also jumped to a four-month high, above levels seen before Ueda’s first policy decision at the helm of the central bank in April.
While the traders are jumpy, economists have pushed back their call for a policy shift from the central bank after Governor Kazuo Ueda repeatedly made the case for maintaining monetary stimulus. Slower-than-expected increases in consumer prices both in the US and UK point to easing inflationary pressures globally, bolstering their case. Yet inflation in Japan remains above the BOJ’s target.
“Volatility has risen before BOJ decisions and eased back after. We’ll continue to see a repeat of this again and again,” said Akio Kato, chief manager of the strategic research and investment division at Mitsubishi UFJ Kokusai Asset Management Co. in Tokyo. “Even if there’s no change, inflation is getting closer to the central bank’s target, so views remain in the market that upward pressures on yields are building.”
Volatility in bond futures rose to 7.3% on Friday, indicating an expected daily spike or drop of about 5 basis points in the benchmark yield that the BOJ aims to cap at 0.5%. Yield on the benchmark 10-year note added 2 basis points to 0.475% after government data showed growth in consumer prices excluding fresh food quickened last month.
The central bank will release its updated forecasts on inflation and growth when announcing its policy decision on July 28. Ueda said this week that the BOJ has continued with monetary easing under yield-curve control with a “premise” that there is still some distance to stably hitting its inflation target.
Still, the nation’s bonds have dealt investors a loss of 0.7% this month, the worst performance only after Canada among 24 major government debt markets tracked by Bloomberg.
–With assistance from David Finnerty.
(Updates information in second and fifth paragraphs, as well as in first chart.)
More stories like this are available on bloomberg.com
©2023 Bloomberg L.P.