Mr Trump’s protectionist rhetoric unnerved stock markets on Monday. However, the reaction in the US Treasury and JGB markets was telling: yields on 10-year JGBs and US Treasuries both finished higher on the day.
The pressure on JGBs is building. The domestic economy is strong: the new job offers-to-applicants ratio jumped in December, equalling the peak of February 1991.
Japan’s yield curve control can be a strong policy tool amidst global reflation. The BoJ stepped up its purchases of 5- to 10-year bonds last week after yields climbed to eleven-month highs, but this retroactive approach risks undermining the central bank’s credibility.
Either way, the BoJ will struggle to keep the yen down. Japanese exports were strong again in December. The corporate sector remains undervalued by equity investors.
Summary
- Implications for JGBs clear: higher yields
- Current BoJ approach to yield curve control could backfire
- Central bank should offer unlimited purchases
