Traders pile into bets that Bank of Japan will end negative rate
Traders are rapidly increasing bets that the Bank of Japan will scrap the world’s last negative interest-rate regime as soon as this month, after the central bank’s leaders indicated they could be preparing a shift in policy.
The sell-off, initially fuelled by comments from BOJ governor Kazuo Ueda and one of his deputies, jolted financial markets in Tokyo and beyond, shattering a period of relative calm for Japan’s bonds.
Bank of Japan governor Kazuo Ueda told lawmakers in parliament that his job was going to get more challenging from the year-end, helping fuel speculation of a near-term scrapping of the sub-zero rate. Bloomberg
A sharp strengthening of the yen and the biggest move in Japanese bond yields in a year served as a stark reminder to international investors that a major anchor for global borrowing costs may soon be dislodged. The currency extended its climb and traded at its strongest in nearly four months on Thursday in New York.
Ueda told lawmakers in parliament that his job was going to get more challenging from the year-end, helping fuel speculation of a near-term scrapping of the sub-zero rate. While that comment came in response to questions, his subsequent visit to Prime Minister Fumio Kishida’s office to discuss his monetary policy stance seemed more like a staged move aimed at delivering a signal.
Yet deputy governor Ryozo Himino’s playing down of the adverse effects of a rate hike on Wednesday was probably the most significant of the apparent communication cues from the central bank. Himino’s hypothesis for what might happen if the central bank ended negative rates looked like a clear paving of the way toward that eventuality.
The key question that remains is when it will take place. The BOJ meets on December 18-19, followed by another policy gathering in January. Meetings in March and April then follow after the results of next year’s labour union pay negotiations emerge.
Swaps shift
Overnight-indexed swaps at one point on Thursday showed an almost 45 per cent chance that the BOJ would end its negative interest rates policy at this month’s meeting. Just two days ago – before Himino’s speech – they showed just a 3.5 per cent risk.
The yen extended gains against the US dollar to about 2 per cent and breached the 145 level on Thursday; it was at 142.56 at 1.40pm in New York. With a poorly received 30-year government bond auction adding to the drama, the benchmark 10-year yield jumped 11 basis points to 0.74 per cent.
“The November rally in bonds has given fertile ground for the BOJ to tweak monetary policy before Christmas,” said Althea Spinozzi, fixed-income strategist at Saxo Bank. “Yet, what we have learnt from the BOJ is that any tweak is going to be moderate and gradual.”
Market players could be over-interpreting a softening of the ground by the BOJ officials for a move next year as a hint for action this month. The BOJ will unveil updated price forecasts in January and April that could be used to support the case for policy change, making those meetings more likely options from the perspective of economists.
Still, the sense that there is a growing probability of action at any of the coming meetings has strengthened.
Ultra-loose policy exit pricing
Himino’s speech had turned the BOJ’s December meeting “live”, Daiwa Securities strategists Ryoma Kawahara and Kazuya Sato wrote in a note.
Looking at the bond market, Mizuho Securities strategist Shoki Omori said Himino was “cracking the belly of the curve”. He said investors were now beginning to price for “the central bank’s exit from ultra-loose monetary policy in January rather than previous consensus view of April”.
The yen was up against all of its Group-of-10 peers.
“It’s all about the BOJ,” said Mingze Wu, a currency trader at Stonex Financial. “FX traders appear happy to be buying the yen on risks of a BOJ move in December.”
Thursday’s auction of 30-year sovereign securities had the lowest bid-to-cover ratio since 2015. The so-called tail, or the difference between the average and lowest-accepted prices, was the longest on record. Yields on the 30-year debt jumped 9.5 basis points to 1.69 per cent.
Adding fuel to speculation of a shift from the ultra-loose monetary policy, the BOJ has been conducting a special survey of market participants, including a workshop to discuss its impact and side effects.
Some market participants also see a growing possibility of a US rate cut hastening the end of the BOJ’s negative rates.
“It is probably easier for the BOJ to take action in January when the Fed is unlikely to either raise or cut its benchmark rate,” said Tadashi Matsukawa, head of fixed-income at PineBridge Investments Japan. The central bank is likely to end the negative rate policy in January, he said.
Bloomberg
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