The End of Japan’s Negative Interest Rates

Japan is on the verge of ending its era of negative interest rates in the coming months, marking a significant shift in global markets. A recent Bloomberg Markets Live Pulse survey indicates that the repercussions of this policy change will be substantial, with US Treasuries likely to bear the brunt.

BOJ’s Transition in 2024

The Bank of Japan (BOJ) is expected to reverse its unconventional sub-zero interest rate policy in the first half of 2024, as indicated by the majority of the 315 survey respondents. This move will mark the conclusion of a bold experiment initiated in 2016, setting Japan apart from other major central banks that have been aggressively tightening policy to combat inflation.

Global Market Impact

The BOJ’s actions and timing will have a ripple effect throughout global markets. The most significant consequence, according to MLIV Pulse survey participants, is that Treasuries will experience increased turbulence. The rationale behind this is that higher yields in Japan would entice Japanese investors, who hold substantial amounts of US, European, and Australian debt, to repatriate their funds.

Martin Whetton, head of financial markets strategy at Westpac Banking Corp. in Sydney, explained, “A shift in the BOJ’s policy could slow the export of capital from Japan as yields become more attractive locally than they were before.”

Treasuries at the Forefront

A notable 37% of survey participants believe that Treasuries will be the asset most impacted by Governor Kazuo Ueda’s departure from super-accommodative policy. Additionally, 36% anticipate a decline in the US dollar, in which US debt is denominated.

Global Watch on BOJ

Portfolio managers and central banks worldwide are closely monitoring any actions by the BOJ, which has utilized negative rates and yield curve control as key tools to combat stagnant prices. In late 2022, the BOJ caused upheaval in global markets by raising the cap on benchmark 10-year bond yields, further pushing up bond yields.

Eugene Leow, a senior rates strategist at DBS Bank Ltd., stated, “Some form of normalization is probably necessary. This could mean upward pressure on five- to 10-year developed-market yields as higher Japanese government bond yields spill over.”

Impact on US Treasuries

Japanese investors hold over $1.1 trillion in US government bonds, making them the largest foreign holders. However, there has been a net outflow of funds, with life insurers selling a substantial amount of foreign bonds in recent periods.

Anticipated Bond Market Volatility

The MLIV Pulse survey reveals that 61% of respondents expect an increase in global bond market volatility when the BOJ shifts its policy, with most predicting this historic step to occur next year.

Ayako Sera, a market strategist at Sumitomo Mitsui Trust Bank Ltd., said, “The market will probably be very jittery until traders and investors will get used to a world with positive yields. It’s like a big stone being thrown into a pond where there has been no wind.”

Treasuries’ Volatility

Treasuries, typically known for stability in savings and investment portfolios, have recently been more volatile than stocks. The combination of the Federal Reserve’s aggressive policy tightening and the surge in US government bond sales has led to historical losses, particularly for long-duration debt.

BOJ’s Yields and the Yen’s Performance

Survey participants were asked when they thought benchmark Japanese 10-year sovereign yields would reach 1%, the limit tolerated by the BOJ. A majority of 43% believe this will occur in the first half of 2024 or later, indicating the current pace of increase.

Yield Gap and Yen’s Decline

Japanese 10-year yields have nearly doubled since the BOJ raised the cap, but they remain far below their US counterparts. This widening yield gap has contributed to the yen’s status as the worst-performing currency among the Group of 10 this year, having lost over 12% against the US dollar.

Dollar-Yen Rate Predictions

The majority of survey respondents, at 62%, predict that the dollar-yen exchange rate will fall within the range of 140 to 150 by the end of the year. This reflects expectations of continued yen weakness.

Survey by MLIV Pulse

The MLIV Pulse survey, conducted by Bloomberg’s Markets Live team, gathers opinions from Bloomberg News readers. This week’s survey also asks readers to weigh in on whether Novo Nordisk or Nvidia is the better investment. Share your views here.