Japanese government bonds likely to stay low

Low inflation expectations and continued quantitative easing look likely to hold down yields.


The yield on 10-year Japanese government bonds (JGBs) is now at 0.04%, within the Bank of Japan’s yield target of 0% with a +/- 10 bp range.

Last week, however, yields rose to 0.105%, prompting a Bank of Japan (BoJ) intervention to buy bonds. On July 10, BoJ Governor Haruhiko Kuroda reiterated that the central bank remained ready to adjust policy as needed.

“Yield expectations are also likely to be moderated by a general belief that the BoJ is unlikely to taper its quantitative easing program any time soon.”

At its last meeting, the BoJ reiterated its commitment to yield curve control, until inflation (ex-fresh food) is stable and above 2%. This measure of inflation was only 0.4% in May, as was headline inflation.

Following this, inflation expectations remain low. The graph below shows how Japan’s 5Y5Y inflation swap rate (which reflects the markets’ expectation of the average level of inflation in the five year period starting in five years’ time) has continued to dip in recent months. Given that positive correlation between inflation expectations and yields, upside pressures on Japanese yields will likely be muted.

Looking ahead, Japanese yields are likely to be stable around current ranges. With actual inflation unlikely to significantly trend up, we still expect 10-year JGB yields to return to 0.1% by June 2018. We expect Japanese consumer price inflation to increase 0.7% in 2017 and 1% in 2018.    


Source: Bloomberg Finance L P, Deutsche Bank Wealth Management. Data as of July 12, 2017.

Tuan Huynh

Source: CIO Bulletin, July 14, 2017