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Japan Enters Yield Curve Chaos

It took 40 year high Inflation for the Bank of Japan (BoJ) to finally move from the phase of denial to acceptance. And this change was marked by the change in the band of tolerance for the yield that increased from 0.25% to 0.5%. This resulted in shock moves in all of the country's assets.


The yield instantly breached 0.25% and the Yen moved by 3%. These moves might support the view of BoJ that currently, interest rates do not need to change but the investors will start to price a rate reversal policy by the first half of 2023. This might coincide with the appointment of the new governor as the current governor's term ends on 8th April 2023.


The action is taken today and its impact will not only bring the change in rate trajectory but also result in heavy MTM losses in the books of bondholders. Though the largest will be booked at BoJ itself, it holds more than 50% of the total bonds.


An interest rate hike when happens will be one of the most critical events in recent times in the financial world. As it would remove the label of being the largest source of low-cost money as the currency market volatility will increase further leading to an increase in hedging costs.


The dangerous consequences of the action today might unravel over the next few months in financial markets but there will be an immediate impact on the books of pension and insurance companies that are the largest income as well as return providers to the Japanese citizens that are already facing difficult times due to inflation.

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