BOJ Spurs Bond Volatility on Policy Review Markets Can’t Predict

(Bloomberg) -- Bank of Japan Governor Haruhiko Kuroda has surprised investors so often that views on his next move are all over the map. The only sure thing in the run-up to the BOJ board meeting next month may be wilder market swings.

Volatile movements in Japanese government bonds are likely because debt investors aren’t able to price in the outcome of the meeting, according to Hiroki Tsuji, a market analyst at Mizuho Securities Co. in Tokyo. A measure of JGB price movements over 60 days rose to 3.7 percent on Aug. 10, its highest in four weeks, and a level close to double the average for the last decade.

“We have been here before,” said Richard Jerram, the chief economist at Bank of Singapore Ltd. “Kuroda has misled the markets in the past and so they are going to be very hesitant to trade off any guidance that he is offering.”

Kuroda blindsided markets in January when the BOJ adopted negative interest rates, in a move that sent JGB volatility to the highest since 1999, and again in July when it limited its expansion of stimulus to buying more exchange-traded funds. The current review has even generated speculation that the central bank will reduce stimulus or scrap its two-year time frame for achieving its inflation target, though there has been little to signal such a shift.

“If they did that, they would be weakening their message and I don’t think that is really their intention,” Keisuke Tsumoto, the head of fixed income at the Japanese asset-management unit of Manulife Financial Corp., said of the time reference. “There are some people in the market who think the BOJ, in its comprehensive assessment, will change its current policy by either reducing JGB purchases or abolishing its negative rates. They will probably be disappointed.”

Tsumoto said the BOJ may send government bond yields back to record lows as it presses ahead with its buying program, and the central bank may also cut minus rates further.

“The reassessment in September has been taken in two ways,” with investors taking opposing views on whether the BOJ adds or reins in stimulus, said Darren Ruane, the head of fixed income at Investec Wealth & Investment Ltd. in London. “That’s the big question mark. Volatility is likely to go up.”

Sixteen of 33 economists said in a Bloomberg survey this month that the BOJ may adjust its time goal, while 10 said the two-year target will be scrapped. Kuroda’s board in April moved back the timing of achieving 2 percent inflation to sometime in fiscal 2017, the fourth time for it to postpone the expected date.

For a Gadfly column on gyrations in Japan’s stock market, click here.

In July, the monetary authority limited its expansion of stimulus to buying more exchange-traded funds, refraining from other easing measures such as adding to its bond purchases. Disappointment among investors who had speculated that the central bank may start of a policy of so-called helicopter money, or direct financing of government debt, caused 10-year yields to rise the most since 2013 on July 29, the day of the announcement.

The 40-year bond yield was at 0.365 percent Tuesday in Tokyo, compared with a record low of 0.045 percent on July 6. The 10-year yield was at minus 0.1 percent on Wednesday.

“Is Japan the poster child for what goes wrong when you reach the limits of monetary policy?” said Janet Henry, global chief economist at HSBC Holdings Plc, in a Bloomberg Television interview. “Absolutely, it is.”

To contact the reporter on this story: Finbarr Flynn in Tokyo at fflynn3@bloomberg.net. To contact the editors responsible for this story: Andrew Monahan at amonahan@bloomberg.net, Sandy Hendry at shendry@bloomberg.net, Ken McCallum, Tomoko Yamazaki

©2016 Bloomberg L.P.