Multiple factors behind the rise in Japanese bond yields: QNB

Doha, Qatar: Qatar National Bank (QNB) attributed the rise in long term Japanese government bond yields to several factors, most notably a structural...

Doha, Qatar: Qatar National Bank (QNB) attributed the rise in long-term Japanese government bond yields to several factors, most notably a structural shift in nominal growth driven by changes in political leadership, in addition to declining institutional demand amid regulatory changes.

In its weekly commentary, QNB said, "After decades of deflationary stagnation and exceptionally low interest rates, Japan has entered a new macroeconomic regime. Following the Covid-pandemic and the Russia-Ukraine war, the "supply shocks" of confinement measures and geopolitical disruptions, combined with the global surge in commodity prices fuelled prices in Japan.

These events amplified with a large "demand shock" from an unprecedented boost from significant fiscal support with ultra-loose monetary policy, pushing up the prices of goods.

"After major central banks began to hike interest rates to bring inflation under control, the interest rate gap with Japan widened, while the Bank of Japan (BoJ) maintained its "ultra loose" monetary policy with a negative short-term policy rate of -0.1 percent. As a result of this gap, the Japanese Yen (JPY) depreciated sharply, inducing a wave of renewed price pressures, pushing inflation above 4 percent in early 2023, a level that had not been reached in over three decades.

"To bring inflation under control, the BoJ started a historic process of monetary policy normalization, finally ending negative rates for the first time in 17 years. Since 2024, the BoJ has increased the policy rate 4 times, for a total of 85 b.p. Additionally, the BoJ has formally ended its Yield Curve Control (YCC) programme, removing the cap on the 10-year JGB (Japanese Government Bond) yield and shifting to a more flexible framework. With the end of YCC, the BoJ began to scale back its purchases of JGBs: from monthly bond purchases close to JPY 9 Tn at their peak in 2023, to around JPY 3 Tn, with further gradual reductions planned.