Mr. JGB, a former finance ministry official celebrated for his pivotal role in overhauling Japan’s debt issuance management, suggests that Japan’s bond market will navigate the normalization steps of the central bank without significant upheaval in the coming year. Michio Saito, widely known as Mr. JGB, asserts that even if the Bank of Japan (BOJ) revises its yield curve control program or raises its short-term policy rate, Japanese long-term yields are unlikely to surge much beyond 1%.
In an interview last week, Mr. JGB expressed confidence that the conclusion of Japan’s negative interest rate era will not prompt a series of aggressive rate hikes similar to those witnessed in the United States and Europe. This, he believes, will act as a constraint on 10-year yields. The anticipated move by the BOJ to raise interest rates, a step expected by economists due to inflation persistently exceeding 2%, is not seen as a cause for undue concern among market participants, according to Saito.
The bond market experienced a near breach of the 1% mark in early November, following the central bank’s announcement of a departure from daily fixed-rate buying operations that had previously set a strong boundary at that level. However, Saito notes that the dynamics have shifted since the Federal Reserve hinted at potential interest rate cuts in the United States in 2024.
Despite the potential for Japan’s 10-year bond yield to double from its current level below 0.6%, Saito emphasizes that the crucial point is that yields are not expected to continue surging after the initial increase. He highlights the ongoing support the central bank is likely to provide to the economy, contributing to a stable environment even if there are tightening measures.
Saito, currently an executive fellow at Nomura Institute of Capital Markets Research, acknowledges that while higher yields may result in valuation losses for financial institutions’ bond holdings, an increase in short-term interest rates would enable these institutions to raise rates on loans. This, in turn, could improve lending margins if they can adjust their own rates accordingly.
Regarding the BOJ’s inflation target, Saito suggests the possibility of achieving stability this year, albeit not precisely as envisaged by the central bank. He anticipates that the chronic labor shortage will play a primary role in influencing wages and prices, rather than the traditional model of strong demand driving a virtuous cycle.
