The Bank of Japan (BoJ) are growing worried about the bond market and not reflecting the recent inflation, which could cause the risk of sharp increases in yields. The Japanese government bond (JGB) is yielding .615 percent and has not moved much since March 2013. A large portion of this is the massive bond buying program the BoJ has conducted since last April.
The latest inflation shows that consumer prices are increasing sharply. Yesterday’s Tokyo inflation gauge hit 2.8 percent from one percent, marking the fastest increase since 1992. However, the national measure of inflation was maintained at 1.3 percent for the last four months. Both measures were one-tenth less than analyst expectations.
BoJ Governor Haruhiko Kuroda said the quantitative measures should have put downward pressure on yields but maintains that the central bank has no target for yields. Mitsuru Saito, chief economist for Tokai Tokyo Financial Holdings Incs., is “worried about the risk of yields spiking.” Saito said that even the hint of a potential BoJ exit would cause long-term yields to surge higher.
There is additional worry that the central bank will fall into a quantitative easing trap, the inability to taper asset purchases without triggering a yield surge. Richard Koo, chief economist at Nomura Research Institute Ltd., believes that excess slack in the economy is near zero, and that could provide the groundwork for a reduction is asset purchases.
By the end of the year, Japan’s debt will equate to 242 percent of gross domestic product, according to the International Monetary Fund (IMF). Just a one percent increase in yields would result in a ¥7.5 trillion in capital losses.