Japan Bonds Signal Ueda-Led BOJ May Keep Negative-Rate Policy

(Bloomberg) — While bond investors are betting that the Bank of Japan will tweak its much-debated yield-curve control policy, they still see new Governor Kazuo Ueda sticking with negative rates for now.

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Yield on the benchmark two-year government note has fallen since mid-January, while the 10-year yield has stayed around the BOJ’s 0.5% policy ceiling. The moves “may be signaling growing speculation that the BOJ will tweak yield-curve control further but is less likely to lift the negative-rate policy,” Keisuke Tsuruta, a bond strategist at Mitsubishi UFJ Morgan Stanley Securities Co. in Tokyo, wrote in a research note.

The central bank has been imposing an interest rate of minus 0.1% on parts of deposits that commercial banks hold at the BOJ since January 2016. While this policy tool has helped keep two- and five-year yields anchored, the BOJ’s cap on 10-year yields necessitates it to make unprecedented debt purchases and risks deepening market distortions — the issue that the monetary authority said prompted its decision to double the yield ceiling in December.

Ueda’s past action also supports speculation that he may not rush to lift the negative-rate policy. He had voted against pulling away from the zero-rate policy when he was a BOJ board member in August 2000.

Strong demand for Japan’s five-year notes at an auction on Thursday also suggests investors aren’t particularly concerned about a removal of the negative-rate policy. The sale drew a higher-than-estimated cut-off price and saw a jump in the bid-to-cover ratio, a gauge of investor interest.

In the currency market, traders see implied volatility peaking around the time of current Governor Haruhiko Kuroda’s last policy meeting in March before easing into Ueda’s first meeting in April, data compiled by Bloomberg showed.

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“The market is cautious about a surprise decision from Kuroda’s meeting,” said Yuji Saito, senior advisor at Credit Agricole CIB’s global market division in Tokyo. “In common sense, there shouldn’t be any policy change in the last meeting, but Kuroda tends to outwit the market.”

–With assistance from Masahiro Hidaka.

(Adds 5-year note auction result in 5th paragraph.)

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