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The Japanese bond market rarely suffers from inflation anxiety, and the yen may experience the "darkest day" in four months

Oct 26, 2021 11:01

The sudden spike in inflation expectations in the Japanese government bond market indicates that some investors are changing their long-term view that the Japanese economy can withstand any global supply-side shock. Affected by this, the yen weakened sharply, and the US dollar against the yen oscillated higher on Monday (October 11). It once hit a new high since December 2018 to 113.04, an increase of about 0.6%. It is expected to record the largest one-day increase since early June. .

Due to rising commodity prices and global supply tensions, growing global inflation concerns have prompted investors to buy inflation-linked Japanese bonds, which pushed up the 10-year break-even inflation rate (BEI) last week.

Although investors seem to be confident in the Bank of Japan’s ability to anchor bond yields, inflation expectations have rarely jumped to 2018 levels, indicating that in a country plagued by deflation for decades, the epidemic is changing people’s perceptions of price pressures .

Tadashi Matsukawa, head of fixed-income investment at PineBridge Investments in Japan, said, "I think many investors are a little careless about inflation, thinking that even if there is inflation elsewhere in the world, this will not happen in Japan."

Matsukawa believes that consumers no longer feel that price increases are unacceptable. "It has been a long time since people go out to drink, and they may be more eager to spend money on it now. If you think that this situation will last forever just because deflation has been going on for a long time, then you may be beaten in the face. ."

The 10-year break-even inflation rate (BEI), the gap between inflation-linked bonds and traditional bonds, rose to 0.36% last week, which means that the market expects Japan’s inflation rate for the next 10 years to average 0.36%.

In contrast, the inflation expectation in mid-July was only 0.07%, and it was around 0% at the end of last year.

Since the end of 2020, the bond market’s pricing of inflation has also been higher than the actual inflation rate.


(Japanese inflation: the blue line represents BEI, the orange line represents core CPI)

Japan's official consumer price index (CPI) has so far shown no signs of rising prices. In August, the core CPI remained flat with the same period last year, ending a 12-month continuous decline. [nL6S2QQ00F]

If you exclude the effects of the two consumption tax increases, the average inflation rate in the past 10 years is about 0.1%.

Since the inflation rate is far from reaching the Bank of Japan’s 2% target, investors expect the central bank to insist on a large-scale monetary stimulus for the foreseeable future.

Pin on the Bank of Japan


To be sure, many market participants said that they should have reservations about Japan’s BEI interest rate because the inflation-linked bond market is small, with limited participants and low trading liquidity.

Compared with other countries, the expected inflation level is also very low-the United States is about 2.45%, and Germany is about 1.60%.

However, there are preliminary signs that price pressures are building up. According to data from human resources company En Japan, due to signs of labor shortages, the hourly wages of contract workers in August rose 3.1% year-on-year, the largest increase since December 2019.


(Japanese wages are beginning to increase: the blue line represents hourly wages, the left axis; the bar represents year-on-year changes, the right axis)

Government data showed that wages increased by 0.7% in August, but analysts said this data may be misleading, because the increase in low-income jobs may put pressure on overall wage growth.

On Monday, inflation concerns pushed the yield of Japanese 10-year government bonds to a four-month high of 0.085%. However, investors believe that there is limited room for further increases and firmly believe that the Bank of Japan will firmly hold on to its determination to maintain yields close to zero.

Hiroaki Hayashi, director of Wells Fargo Investment Consulting, said: “Without the Bank of Japan’s yield curve control policy, the 10-year JGB yield could easily rise to 1%.”

The policies of the Fed and the Bank of Japan drift away, and the dollar against the yen hit a new high in the past three years



The yen fell to its weakest level in the past three years. As more and more people bet that the Fed will reduce its stimulus, while Japan maintains its easing stance, the yield gap between Japan and the United States has widened.

The dollar hit 113.04 against the yen, the highest level since December 2018. The Japanese Yen is the worst performing G-10 currency this year.

Since the end of September, the yen's decline has accelerated. The soaring oil price has intensified market speculation that the Fed will begin to reduce bond purchases in November to control inflation. This is in sharp contrast to Japan: Since the outbreak, the cost of living in Japan has been declining most of the time, and the Governor of the Bank of Japan Haruhiko Kuroda said that he will decisively increase stimulus when necessary.

The difference in the outlook for the Japanese and US monetary policies has widened the interest rate differential between Japan and the US, prompting investors to sell Japanese yen and buy US dollars.

(Daily chart of USD/JPY)

GMT+8 20:22, USD/JPY is now at 113.02/04.