The Bank of Japan (BOJ) tightens grip on bond market as the Yen tanks

Key Takeaways:

  • The Bank of Japan has announced it will stick to its dovish policy of maintaining low interest rates
  • The BOJ has been aggressively purchasing Japanese Government Bonds (JGB)
  • The Japanese yen has fallen to a 24-year low against the US Dollar
The Bank of Japan maintains ultra-low interest rates as the Japanese Bond Market sends the the yen plummeting to 24-year low against the USD
The Bank of Japan insists on ultra-low interest rates. Pic Credit: Wiiii via Wikimedia Commons

YEREVAN ( — As the global economy braces for a possible recession, the Japanese bond market and economy could be on the verge of collapse. The Yen depreciates while the Bank of Japan (BOJ) insists on sticking to its ultra-low interest rates. 

The Yen, Japan’s currency, opened the year at 115 against the US Dollar. However, owing to accelerated depreciation, it has fallen past the 135 mark, a 24- year low. 

Japan’s core consumer inflation (CPI) in April exceeded the central bank’s target of 2% for the first time since 2015. However, this is considerably lower than most countries, allowing the BOJ to stick to its dovish policy. 

Recommended: Inflation will ease with a 5% unemployment rate, says Lawrence Summers

What is happening to the Japanese bond market? 

The Bank of Japan (BOJ) has, over the years, pursued a policy of indefinitely capping the yield on the benchmark 10-year Japanese government bonds at 0.25%. 

However, in mid-June 2022, the 10-year government bond yields crossed this policy line after rising 0.5 basis points to 0.255%. This brought the BOJ’s action into the spotlight, with experts questioning if the bank could hold on to this policy any longer. 

In contrast, the 10-year US Government bonds yield crossed the 3% mark in early May of 2022.

To control the Bond Yield Curve (BYC), the BOJ has had to purchase bonds from the market aggressively. The BOJ has reportedly had to resort to printing more cash to deploy fresh capital. This has hurt the Yen’s value further.

Earlier this month, the BOJ increased its five-to-10-year bond purchases to 800 billion yen (about $5.94 billion). Previously, this amount was 500 billion yen or about $3.7 billion. 

Moreover, last week, the BOJ was forced to deploy 10.9 trillion yen ($81 billion)—the highest QE on record for the Asian economic giant—towards government bond purchases to drag the 10-year yields back below 0.25%.

Recommended: Bitcoin (BTC) price plunges below $25K following headwinds from growing inflation — what’s ahead?

Why is this a problem? 

In a recent report, the Deutsche Bank warned that the Bank of Japan’s strategy to aggressively buy bonds to achieve its yield curve control (YCC) target could cause “dramatic, unpredictable nonlinear” volatility in financial markets. 

In addition, the DB warned that the Yen could lose its fundamental valuation, driving the Japanese financial market towards a systemic collapse.

Meanwhile, pressure has been building up on the Japanese Central Bank. Its resolve to keep these yields low, along with its “dovish” policy to retain low-interest rates unlike other major central banks, is drawing a major backlash.

The Japanese yen’s drop to a record low has both citizens and businesses worried in Japan. The currency’s devaluation has impacted the purchasing power of Japanese consumers.

The Japanese Yen is falling against the USD
The Japanese Yen is falling against the USD. Credit: Dollar Yen Exchange Rate (USD JPY) – Historical Chart -Macrotrends

Moreover, increased prices of fuel and raw material imports force companies to hike the prices of goods, thus resulting in higher costs of living for citizens.

Against a weakened yen and increasing inflation, households in the country will shun the Japanese currency. In a desperate move to protect their savings, citizens will liquidate their Yen to convert them to USD.
Moreover, investors are also likely to ditch Japanese government bonds as the 0.25% isn’t worth the risk. Instead, other government bonds with larger returns will get the preference. 

To make matters worse, low-interest rates would also mean Japan will become a funding source for those looking to buy foreign bonds.

“As the interest rates in the country are very low, they borrow from Japan and invest in US bonds, this lowers the value of the Japanese yen,” 

Anadolu Agency quotedSuleyman Mete Ozbalaban, an Asian markets expert saying.

Recommended: Experts warn of recession as global inflation goes over the roof

Bank of Japan unlikely to budge from interest rates

Despite the Yen getting a beating, the Bank of Japan is unlikely to budge. While market watchers and investors hoped otherwise, BOJ is determined to stick to its low-interest-rate policy. 

“There’s no way the central bank will raise interest rates to support the yen. Compared with other countries, Japan has inflation that is still too low to worry about,”  

Reuters quoted Noriatsu Tanji, chief bond strategist at Mizuho Securities, saying.

BOJ Governor Haruhiko Kuroda is convinced that raising interest rates or tightening monetary policy would “add further downward pressure on the economy.”

Meanwhile, one can see the yen crash as a part of Japan’s policy to increase its exports. According to the World Bank, exports make up over 17.5% of Japan’s GDP. So a weaker yen makes Japanese products more attractive in the international market, thus increasing their demand. 

Moreover, the Japanese stock market has become more attractive to investors than US and European stock markets. 

Recommended: How are Central Bankers and Policymakers Losing Control of the Global Economy?

Bank of Japan could disrupt global rates

BlueBay Asset Management oversees about $127 billion across hedge funds and other fixed-income products and has already started shorting Japan’s sovereign debt. That appears like a move to force the BOJ to fall in line with other central banks.

However, with the BOJ still firm on its policy vis-à-vis interest rates and bond yields, the scenario looks dangerous. On the one hand, the Bank of Japan buys billions of Japanese Government Bonds (thus killing what little liquidity is left in the JGB market). On the other, it has no choice but to lend these purchased bonds back into the market. 

“The last man standing continues to be the BOJ…The more the market attacks the Fed and the ECB the more likely it is that the BOJ own forward guidance (in the form of YCC) will end very messily with huge implications for global rates,”

 Deutsche Bank macro strategist Jim Reid wrote in a note to clients on Tuesday.

The Japanese bond market is worth $10 trillion. It was the second-largest in the world before the Chinese bond market surpassed it at $14 trillion. 

The crash of the JGB market will have devastating consequences on the global economy. Moreover, the already bearish stock markets and the cryptocurrency market will also bear the brunt of the crash. 

Japan’s cryptocurrency market indicators

Japan is the third-largest economy with a GDP of $5.06 trillion. It is also the third-largest automobile manufacturing country and the world’s third-largest consumer market.

In 2020, the trading value of crypto assets in Japan amounted to over $863 billion, according to data available on Statista. As of 2021, there were more than three million active crypto-asset accounts on crypto exchanges in Japan.

The Bank of Japan maintains ultra-low interest rates as the Japanese Bond Market sends the the yen plummeting to 24-year low against the USD
Value of transactions with cryptocurrency in Japan. Credit: Statista

Between January and November 2021, cryptocurrency transactions over exchanges in Japan jumped 51% to 103 trillion yen or $900 billion.

An economic crisis in Japan, which many consider inevitable, will have a spillover effect. Moreover, the fall of the Japanese yen will further accelerate the global recession risks, putting the Bank of Japan in a tough spot.

Related Articles

Our Partners