The strength of the US dollar is again a problem for the Bank of Japan (Boxwood). The person responsible for the country’s monetary policy found this Wednesday with the ten-year Japanese sovereign bond above 1% profitability, a level not seen since July of this year. The Republican victory in the United States and the arrival of Donald Trump are partly to blame, although Japan also owns its own problems.
The last time this bond was quoted at current levels in the secondary market, there was a scare in the market due to the effect of the carry trade and the change in strategies of investors who seek cheap financing by taking advantage of the differential between interest rates of the main central banks. At that time, the dollar was exchanged for more than 155 yen, a crossing that also occurred this week.
The market is pricing in that the BoJ will be forced to make another 10 basis point hike in its benchmark rates at the December meeting, according to Bloombergin his effort to avoid the collapse of your currency. Then there would be two other similar increases until May 2025, where a rate of 0.55% would be reached not seen since September 1995. But, along the way, Japanese sovereign debt would maintain its upward return, unless the BoJ continues with the purchase of debt.
Japan’s sovereign bond yields have tracked US debt yields in recent weeks. And higher interest rates for longer than expected in the United States (as a result of a strong dollar due to higher than expected inflation) will force the Bank of Japan to tighten monetary policy at higher speed or with greater intensity. “We are currently expecting one increase in December and, in fact, four more over the course of next year,” said Sonal Desai, chief investment officer of fixed income at Franklin Templeton.
The Japanese sovereign debt market has been intervened by the BoJ, based on bond purchases, to control profitability and prevent the depreciation of its currency. Still, that hasn’t stopped the shortest-term bonds, the most sensitive to central banks when the country’s monetary policy is being adjusted, they register returns not seen in decades. This is the case of the two-year Japanese bond, which shows returns that are close to 0.52%, the highest in December 2008.
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