ECONOMICS Bloomberg Businessweek October 14, 201937ILLUSTRATION
BY
NICHOLE
SHINN
;KURODA:
MUNEYUKI
TOMORI/KYODO
NEWS/AP
PHOTO;
DATA:
COMPILED
BY
BLOOMBERG
THE BOTTOM LINE The Bank of Japan wants to nudge up yields
on long-term bonds while curbing short-term rates, a maneuver
never tried by central banks.the central bank has again embarked on a daring
experiment: driving certain interest rates higher.
After years of trying to spark economic growth
by bringing down both short-term and long-term
interest rates, the BOJ in recent weeks has been
moving to lift yields on government bonds, partic-
ularly the super-long-dated ones. In normal times,
such a maneuver might be construed as monetary
tightening. But BOJ Governor Haruhiko Kuroda
has continually stressed that the bank is very
much in easing mode. He said last month that the
BOJ “will not hesitate to add stimulus” if needed,
and a number of forecasters expect that he and
fellow board members will cut the bank’s short-
term policy rate—now at negative 0.1%—on Oct. 31.
Kuroda lately has warned that ultralow yields
on super-long-term bonds—say, 20 years and up—
could be bad for the economy. “It will have a neg-
ative impact on consumer sentiment,” he said on
Sept. 19. Low yields are psychologically damag-
ing since they reinforce the expectation that eco-
nomic growth will remain sluggish over the long
term, incentivizing households to save rather than
spend. The paltry returns also represent a very real
threat to Japan’s population of pensioners, which
numbered 40 million at last count and is headed
inexorably higher.
Following those comments, BOJ officials have
been trimming their bond purchases to an annual
pace of 5 trillion yen, according to a calculation by
Bloomberg Economics. That’s just a fraction of the
official target of 80 trillion yen ($47 billion), though
that’s been disregarded for some time now. In its
latest monthly plan, the BOJ also signaled it even
might stop buying bonds with maturities surpass-
ing 25 years.
“They want to have their cake and eat it, too,”
says Paul Sheard, a senior fellow at Harvard’s
Kennedy School who worked as an economist in
Japan over a three-decade span. In other words,
the BOJ seeks, on one hand, to boost the economy
by depressing short- and medium-term rates, while,
on the other, it wants yields at the very long end to
reflect the success it envisions in generating growth
and inflation.
To convince markets and the public that it’s
committed to easing for the long haul, the BOJ
has pledged to keep expanding its balance sheet
via bond purchases. So if it stops buying some
bonds to drive up yields—as prices and yields move
inversely—then it must buy more of others. “The
problem is, it’s kind of like whack-a-mole,” where
the central bank then needs to keep changing its
operations to address problems with excessively
low yields at differing maturities, Sheard says.They may yet try to do just that, though.
“Lowering short-term rates while lifting up longer
ones will be very challenging,” says Masaaki Kanno,
who worked at the BOJ from the 1970s to the 1990s
and is now an economist at Sony Financial Holdings
Inc. “Obviously the BOJ has to care about pension
funds and life insurance companies,” he says, which
are hurt if there are negligible interest payments on
long-dated bonds. “Japan is aging rapidly, and it’s
becoming a big part of the economy.”
The BOJ’s latest moves came after 20-year bond
yields slumped to just 0.02% in early September.
Since Kuroda started sounding the alarm and offi-
cials rejiggered their bond purchases, they climbed
to 0.18% by Oct. 7.
What makes these maneuvers tougher is that
the BOJ has already bought more than 43% of the
entire Japanese government bond market. (In the
U.S. the Federal Reserve has about 13%.) In the pro-
cess, it’s expanded its balance sheet beyond 100%
of gross domestic product—much more than the
levels of its U.S. and European counterparts at 18%
and 39%, respectively.
“Japanese financial institutions were kind of
squeezed out” of the domestic bond market, says
Tadashi Kikugawa, a veteran bond trader who now
works at Nomura Holdings Inc. on investment
products for asset managers. “They are happy to
come back” anytime yields rise.
At the end of the day, the only assured way to
boost superlong yields would be to raise the short-
term policy rate, Kikugawa says, but that would
also risk boosting the yen, which would have an
adverse effect on an economy that is heavily reli-
ant on exports.
The BOJ is the first central bank to go through
these contortions, because Japan’s institutional
investors have been the longest exposed to extraor-
dinarily low bond yields. Germany joined Japan with
sub-1% 10-year yields in 2014; both countries are now
below zero. Even the U.S. has seen bond yields test
historic lows, with potential for further declines,
given the latest weakness in economic data and the
likelihood that the Fed will cut interest rates again.
Whatever the chance of the BOJ’s success with
this new push, now is the time to try, Sony’s Kanno
argues. After all, Japan and the global economy
aren’t in recession, and the job market is strong.
“The BOJ is walking on a tightrope, but in hindsight
it could be seen as a good time, because they may
end up where there is no rope.” —Chris Anstey,
Toru Fujioka, and Tomoko Sato○ Kuroda1.5%1.00.50
10/2013 10/2019○ Japan 20-year
government bond yield