Japanese bonds show rare bout of inflation anxiety

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* Inflation expected in Japan bond market at highest level since 2018

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* Nominal JGB yield is still anchored due to BOJ’s policy

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*CPI far below central bank target, but salaries rising

TOKYO, Oct 11 (Businesshala) – A sudden rise in inflation expectations in Japanese government bonds suggests some investors are turning to long-held beliefs about an economy that is resistant to any global supply-side shock. .

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Rising concerns about global inflation, rising commodity prices and a lack of supplies around the world, have prompted investors to buy Japanese inflation-linked bonds, raising the 10-year break-even inflation (BEI) rate last week. has become more.

While investors appear confident in the Bank of Japan’s ability to anchor bond yields, the rare jump in inflation expectations to 2018 levels speaks to how the pandemic is changing perceptions about price pressures in a country beset by decades of deflation. .

Tadashi Matsukawa, Japan head of fixed income investment at Pinebridge Investments, said, “I think there are many investors who are a little careless about inflation, thinking that this will not happen in Japan, even if the rest of the world is in inflation.”

Matsukawa feels that consumers no longer consider price increases unpleasant.

“People have not gone out to drink for so long. They may be more eager to pay for it now. If you think just because there has been deflation for so long that it will continue forever, you might be in for a terrible surprise.

The 10-year break-even inflation (BEI) rate, the gap between inflation-linked bonds and traditional bonds, rose to 0.36% last week, meaning the market expects Japan’s inflation average to be higher over the next 10 years. We do.

This compares with expectations of inflation of just 0.07% in mid-July and around 0% at the end of last year.

Since the end of 2020, bond markets have also been pricing at inflationary levels higher than the real inflation rate.

Japan’s official consumer price inflation has so far shown little sign of price gains, with the annual core CPI falling flat in August after falling for a year.

Average inflation over the past 10 years, when separating the effects of the two sales tax increases, is about 0.1%.

With inflation approaching the Bank of Japan’s 2% target, investors expect central banks to stick to a massive monetary stimulus for the foreseeable future.

BOJ. trust on

Certainly, many market participants say that Japan’s BEI rate should be taken with a grain of salt as the inflation-linked bond market is small with limited players and illiquid trading.

Expected inflation levels are also a fraction of what’s baked in elsewhere – around 2.45% in the United States and 1.60% in Germany.

Still, there are possible signs that price pressure is building up.

Hourly wages for contract workers rose 3.1% on an annualized basis in August, the biggest increase since December 2019, amid signs of labor shortages, data from staffing firm N Japan showed.

Government data showed wages rose 0.7% in August, although economists say the data could be misleading as growth in low-wage jobs could weigh on overall wage growth.

The factors that once helped control prices have also become less. Chinese labor and prices are not as cheap as they used to be.

Japanese companies have also been more reluctant to move production overseas amid supply chain uncertainty due to the COVID-19 pandemic and US-China tensions.

Inflation concerns helped lift the 10-year JGB yield to a four-month high of 0.085% on Monday, though investors see limited room to move forward, with the BOJ holding tight and yielding close to 0%. Rely on the policy intent of keeping.

There is a spike in risk yields, should investors begin to doubt the BoJ’s commitment.

“Without the BOJ’s policy peg, the 10-year JGB yield could easily rise to 1%,” said Hiroki Hayashi, managing director of Fukoku Capital Management.

Reporting by Hideyuki Sano; Editing by Vidya Ranganathan and Anna Nicolasi da Costa

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