Investors are testing the Bank of Japan’s resolve. The yield on 10-year JGBs climbed 2.9 bps to an intraday peak of 0.089% on Monday, the highest since January 28th. The central bank offered to buy unlimited government bonds below market price on November 17th. On this occasion, yields fell. The BoJ may need to go one step further to assert its credibility, offering to buy bonds above market price.
The policy has succeeded so far. The yen is weakening and the Nikkei 225 closed in positive territory for the first time in 2016 on Monday. The y/y for the PPI is climbing: Japanese import price deflation has eased to 10.2% in November from 23.4% in June. Higher import prices will squeeze living standards, but the rise in employee compensation has been impressive. The tighter labour market will continue to push up wages in Japan. Real compensation of employees rose 0.7% q/q and 2.9% y/y in Q3, the biggest increase since Q1 1996. In nominal terms, compensation was up 0.6% q/q and 2.0% y/y.
Furthermore, the yen will not keep falling forever. The current account surplus rose again in October: the 12-month moving total hit Y20.08tr, the widest since August 2008. The services deficit narrowed to the smallest on record. Japan’s burgeoning competitiveness in niche technology sectors should not be overlooked either.
Summary
- BoJ must signal intentions to keep 10-year JGB yields at 0%
- Yield curve control has succeeded so far, and will become more potent as the recovery takes hold
- National accounts finally capitalise R&D, GDP gets a boost
