Japan: We are on the edge of a policy cliff - Rabobank

Michael Every, Head of Financial Markets Research at Rabobank, suggests that the massive JGB volatility we have just seen may be an echo of the similar sell-off recorded in Bunds in early 2015 given that the BoJ don’t look like they are giving up.

Key Quotes

“Where are Bunds trading today? Even with the current headwinds from Japan pushing global bond yields up, they are well below zero, i.e., Bund yields are now lower than at the lowest point before their sharp 2015 sell-off started.

Indeed, unless and until we see a major structural break from a policy perspective then JGB yields still look likely to remain extremely low. In Japan such a structural break would likely mean one of the following:

(i) an end to QQE/negative rates (i.e., monetary policy tightening, which we see as unlikely, even though it’s being blamed for the current JGB sell-off); or

(ii) a push towards major fiscal stimulus (i.e., fiscal loosening, which argues for higher long yields); or

(iii) the full embrace of ‘helicopter money’ by any name (i.e., fiscal and monetary loosening, which also argues for higher long yields).

Yet even in the case of any of these three scenarios JGB yields are unlikely to rise very high for one key reason: wages still aren’t going up.

Consequently, excluding any of the policy shifts above, global bond yields should also grind downwards. However, we may now be closer to exactly one of those structural shifts in Japan at least.

As such, we may just be hearing echoes in the recent JGB sell-off; but those echoes could mean we are on the edge of a policy cliff. Which cliff we are on the edge of, if any, shall be revealed soon enough.”