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Japan’s era of negative interest rates is likely to come to an end in the first half of 2024, according to a majority of the 315 respondents in the latest Bloomberg Markets Live Pulse survey. The Bank of Japan (BOJ) embarked on this unconventional policy in 2016, but it now stands apart from other central banks, which are aggressively tightening to combat inflation.
This potential shift in BOJ policy carries significant global market implications, with US Treasuries expected to bear the brunt of the impact. Higher yields in Japan could incentivize Japanese investors to repatriate their funds, potentially slowing the export of capital. Consequently, the attractiveness of US, European, and Australian debt to Japanese investors could wane.
Experts suggest that when Governor Kazuo Ueda departs from super-accommodative policy, Treasuries will experience the most substantial impact. Furthermore, the decline of the US dollar is expected to add to the turbulence, as a significant portion of the US debt is denominated in this currency.
Eugene Leow, a senior rates strategist at DBS Bank Ltd., believes that a form of normalization is necessary and could lead to upward pressure on developed-market yields lasting five to ten years, as rising Japanese government bond yields have a spillover effect.
Japan holds the title of the largest foreign holder of US government bonds, with holdings exceeding $1.1 trillion by the end of August. The Ministry of Finance reported net sales of ¥196 billion ($1.3 billion) in foreign bonds by life insurers in the April-September period, following a record ¥8 trillion in sales over the previous six months.
The MLIV Pulse survey highlights that 61% of respondents anticipate an increase in global bond market volatility when the BOJ enacts policy changes. Most respondents predict this historic move to take place next year.
The potential shift towards positive yields poses a significant shift in a market known for stability. Treasuries have become increasingly volatile, especially in long-duration debt, exacerbated by the Federal Reserve’s aggressive policy tightening and the substantial issuance of US government bonds.
Participants were also asked about the expected timeline for benchmark Japanese 10-year sovereign yields to reach 1%, the effective limit tolerated by the BOJ. About 43% of respondents anticipate this level will be reached in the first half of 2024 or later, as Japanese 10-year yields have nearly doubled since late July, but still remain below their US counterparts.
This widening yield gap has made the yen the worst performer among G10 currencies in 2023, with a loss of over 12% against the US dollar. Survey participants predict the year-end dollar-yen rate to range between 140 to 150, with only 14% expecting it to drop below 140. This prediction comes in light of the BOJ’s intervention in October 2022, which led to USD/JPY dropping below 130.
The Bloomberg Markets Live Pulse survey, conducted weekly by Bloomberg’s Markets Live team, includes participants from a variety of financial backgrounds, including traders, portfolio managers, financial professionals, and retail investors.
