Financial markets were shaken by the Bank of Japan’s announcement to make YCC more flexible. The Nikkei Stock Average temporarily dropped above 800 yen, but recovered rapidly towards the close. It left an impression that there are investors who are picking up the downside as they perceive that the easing environment will continue.
― Confused speculation over the upper limit of the allowable fluctuation range of long-term interest rates;
At the monetary policy meeting held until the 28th, the Bank of Japan decided to make yield curve control (YCC) more flexible. Although there were observational reports in advance, the most surprising thing this time was the increase in the yield level of continuous limit operations from 0.5% to 1.0%. Will this policy decision mark a turning point in the market? Pick up points to keep in mind.
● Consecutive limit-price operations with a yield of 1% shook the market
The Bank of Japan sets the upper limit of YCC’s long-term interest rate fluctuation tolerance to “about 0.5%”, but continues to purchase unlimited designated bond issues every business day so that the yield will be “1%”. launched.
When long-term interest rates rise (bond prices fall), bond prices will not fall any further if there are buyers who buy unlimited bonds at the specified yield level (price). In principle, long-term interest rates cannot rise above their yield levels. “Some time after the announcement of the results, when the headlines about continuous limit-order operations came out, speculation spread that the BOJ had allowed long-term interest rates to rise to 1%,” said a domestic securities strategist.
There was concern about a further rise in long-term interest rates and the appreciation of the yen due to the narrowing of the Japan-US interest rate differential. However, as mentioned above, the Bank of Japan has set the upper limit of the permissible fluctuation range of long-term interest rates at “about 0.5%”, following the previous level.
The BOJ explained that the purpose of this “flexibility” of YCC investment was to increase the sustainability of monetary easing, but it took time for the market to interpret it. After the announcement of the results, the dollar-yen exchange rate played a dramatic change of 3 yen up and down. The Nikkei 225 Stock Average, after gaining the upper hand for a time, temporarily dropped to more than 800 yen, and then rapidly declined toward the close.
●Is the “1% attack” countermeasure effective?
There was also turmoil in the bond market. Long-term interest rates soared in the afternoon, and the newly issued 10-year bond yield (long-term interest rate) temporarily reached 0.575%, the highest level since September 2014. However, there is a long way to go before a “1% attack” can be made, and interest rate rises soon come to a halt. It played a significant role in calming the financial market turmoil.
The first point to note is the movement of long-term interest rates. The Bank of Japan immediately announced that it would conduct continuous limit-pending operations with a yield of 1% in the afternoon of the same day. It is also possible that the Bank of Japan has curbed speculative selling of bonds.
In the first place, it is difficult to imagine that long-term interest rates in countries with low potential growth rates will rise monotonically above 1%. In fact, Bank of Japan Governor Kazuo Ueda said at a press conference after the close of trading on the 28th that long-term interest rates are not expected to rise to 1%. He said that the 1% yield level for continuous limit operations was a “just in case” upper limit.
In addition, in the continuous limit-price operation conducted on the afternoon of the 28th, there was no investor who bought a bond with a low yield (high price) of 0.5% or less and sold it at a high yield (low price) of 1%. The bid amount was, of course, zero.
●FY2024 core CPI forecast, median below 2%
The second point to keep in mind is the outlook for prices presented in the “Outlook for Economic Activity and Prices (Outlook Report)” released on the same day. The median outlook for the consumer price index (core CPI), excluding fresh food, was raised from +1.8% in April to +2.5% in FY2011. It fell short of the Bank of Japan’s price target of 2%. It seems that the expectation that inflation will eventually slow down has been emphasized again, and given the BOJ’s logic so far, it is difficult to envision a scenario in which the current easing stance collapses.
And the third is that the Bank of Japan is continuing its negative interest rate policy. Barring a change in current policy to steer short-term interest rates to minus 0.1%, the environment remains accommodative, which should support the downside for stocks. Governor Ueda himself indicated at a press conference on the 28th that there is a long way to go before raising the short-term policy interest rate.
If short-term interest rates remain at a low level and long-term and ultra-long-term interest rates are put under upward pressure, the yield curve will steepen. For financial institutions, it will be possible to invest funds procured at low interest rates in the short-term market at high yields, so expectations for bank stocks to improve profit margins are likely to rise.Actually, on the 28th, Mitsubishi UFJ Financial Group <8306> [東証Ｐ]bank stocks rose more than 5%, putting strong upward pressure on bank stocks.
However, if there is limited room for long-term interest rates to rise, it will be necessary to examine the sustainability of such buying.
Will the downside of Japanese stocks be limited as the easing environment continues?
I have raised several points to keep in mind so far, but even if the core CPI growth rate slows down to a level below 2% as predicted by the Bank of Japan, it is certain that inflation will continue as long as it does not become negative.
Hajime Sakai, chief fund manager at Mito Securities, said, “The BOJ is not moving away from negative interest rates, and the fixation of inflation itself will have a positive effect on the stock market.” “Japanese stocks were conscious of being overvalued due to the rise through June, but even if the level is lowered in the future, investors who perceive that the entry point has arrived are expected to buy, and it is unlikely that the market will collapse significantly. ‘, he says.
The Bank of Japan’s monetary policy decisions are not easy to understand, but the fact that they showed “perseverance” within the same day even when the shock price fell can be said to be reassuring. The central bank week has passed for the time being, although the sense of caution against the long-term interest rate 1% attack led by overseas speculators has not disappeared. If the financial markets regain a sense of calmness, it is likely that we will enter a phase of calmly analyzing corporate earnings and economic and price trends.
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2023-07-28 09:50:00
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