Yamada: Current interest rates cannot be justified. Interest rates should be a function of real growth potential plus inflation expectations plus a risk premium. The numbers can be debated, but Japan’s growth potential is approximately 0.5% to 1%, inflation expectations 1% to 1.5%, plus a risk premium for longer maturities. The theoretical level of Japanese government bond (JGB) yields is thus much higher than the current levels. The BOJ always thought QQE would put downward pressure on the whole yield curve. And the BOJ never had specific targets for JGB yields, but the gap between theoretical level and actual level looks “too much.”
[Editor’s note: This is the second time I have visited the BOJ when someone in the Market Intelligence Group commented that interest rates were surprisingly low. While it is never couched in official BOJ policy and always reflects personal opinions, I feel there is something important underlying the comments. These comments may reflect deeper thoughts within the BOJ and would explain why it has not taken further actions to boost JGB purchases. To wit, why would the BOJ buy more bonds to drive yields lower if it already thinks the yield gap is perhaps too wide already?
The QQE purchase program of monetary accommodation comprises three types of securities: JGBs, real estate investment trusts (REITS) and exchange-traded funds (ETFs). I see ETFs being the only one of its assets the BOJ would not be worried about increasing in volume of purchases.
The BOJ’s ETF purchases—at 1 trillion yen per year1 —have been said to have almost no impact on the market because they are so small relative to the size of the market. I would not be surprised if ETFs were the focal point of adding further easing measures with a doubling possible and maybe even tripling.]
For more insights from my trip to Japan and discussions with market strategists, please see my roundtable here.
1Source: “Introduction of the ‘Quantitative and Qualitative Monetary Easing,’” Bank of Japan, 4/4/13.
Important Risks Related to this Article
Information provided herein should not be considered tax advice. Investors seeking tax advice should consult an independent tax advisor. Investments in currency involve additional special risks, such as credit risk and interest rate fluctuations. Investments focused in Japan are increasing the impact of events and developments associated with the region, which can adversely affect performance.