Japan’s Bond Yields Climb to Highest Level Since the 1990s

Following the end of its long zero-interest-rate policy, the Bank of Japan has raised interest rates for the first time in a decade this year, bringing an economic era to a close. On the bond market, government bond prices have recently continued to drop. The yield on ten-year bonds has risen to its highest level since the 1990s and is now approaching 3 per cent. This is also affecting the mortgage market: for the government, businesses and private individuals alike. Taking on debt in Japan is currently more expensive than it has been for a long time.

Although Japan’s economic data has recently shown surprisingly positive development, bond prices are likely to come under pressure due to budget concerns stemming from the new Prime Minister Sanae Takaichi’s policy of generous spending, as well as fears of further rising inflation and, consequently, further interest rate hikes by the central bank.

Japan’s Economy Suffering Particularly Badly From Surging Oil Prices

Although core inflation in Japan fell to 1.4 per cent in April – its lowest level in four years – many experts expect inflation to rise in the coming months given the ongoing increase in energy costs. With Japan’s resource-poor economy heavily dependent on oil imports from the Middle East, and the Strait of Hormuz – a key route for crude oil supplies – being effectively closed due to the war in Iran, oil and energy prices have skyrocketed this year.

Compounding this is the current weakness of the Japanese yen. This makes oil even more expensive for the country. The yen has been losing ground steadily on the foreign exchange market this year. In view of the yen’s weakness, Japan’s Ministry of Finance has already signaled the possibility of direct intervention in the foreign exchange market to bolster the currency. According to market participants, the central bank has in fact already prevented even greater yen losses on several occasions through market interventions.

Central Bank Could Respond to High Energy Prices With Further Interest Rate Hikes

Experts also believe the central bank is likely to continue its course of interest rate hikes. While inflation has recently remained below the central bank’s 2.0 per cent target, the prospect of rising inflation rates is also fuelling market expectations of countervailing interest rate hikes by the BoJ.

At its last meeting in April, the central bank left its key interest rate unchanged at 0.75 per cent despite the consequences of the war in Iran. However, pressure for a tighter monetary policy was mounting within the BoJ. Three of the nine board members voted in favor of a hike, citing inflationary pressures resulting from the war and marking the highest number of dissenting votes since January 2016. The central bank also revised its inflation forecasts significantly upwards. They signaled a high probability of an interest rate hike in the coming months.

Japan’s New Prime Minister Is Focusing on Investment Despite High Debt

Concerns about Japan’s national budget are also putting pressure on bond prices. Asia’s second-largest economy after China is more heavily indebted than any other major industrialised nation. According to the International Monetary Fund (IMF), the government’s liabilities amount to nearly 200 per cent of the GDP. By way of comparison: Germany’s public debt-to-GDP ratio currently stands at 65 per cent according to the IMF. That of China and the US is just over 100 per cent. Added to this are rising interest rates on the government bond market, which are driving up the cost of taking on new debt even further for the Japanese government.

Despite the high level of debt, Japan’s new Prime Minister announced a shift away from the previous austerity policy as soon as she took office and is focusing on tax cuts and the positive economic effects of government spending. “My government will break with the long-standing trend of excessive austerity measures and chronic underinvestment in the future,” Takaichi said in February. Japan should not hesitate to increase spending to support private investment. At the same time, the Prime Minister also criticized the central bank’s interest rate hike.

Latest Economic Data Came as a Positive Surprise

The latest economic data in Japan has been a positive surprise. Gross domestic product (GDP) rose by 2.1 per cent in Q1 on an annualized basis. Experts had expected well below 2 per cent on average. Private consumption and investment increased by 0.3 per cent, respectively. In addition, the trade balance – the balance of exports and imports – contributed 0.3 percentage points to growth.

Japan’s exports also increased rather strongly in April, driven by continuing strong demand from China and Europe. Export volume rose by 14.8 per cent year-on-year to JPY 10.5tn (~EUR 57bn), marking a surprising acceleration in export growth. The manufacturing sector has also recently shown a positive trend, with output from Japanese factories increasing by 0.8 per cent month-on-month in April in defiance of Analysts’ expected decline of 0.9 per cent. However, many experts fear that rising energy prices and supply bottlenecks caused by the Iran conflict will continue to dampen Japan’s economy as the year progresses.

Performance ERSTE RESPONSIBLE STOCK JAPAN

 

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