International | Apr 21 2006
Economists and market experts have over the past few weeks expressed their view the Japanese bond market has been too aggressive in incorporating the prospects of rising official interest rates in the country.
Now the Japanese Finance Minister Sadakazu Tanigaki has added his voice to the debate. Bloomberg is reporting Tanigaki said while speaking in Japanese parliament “investors in Japanese bonds may be erring in pushing up long-term interest rates in anticipation that the Bank of Japan will soon raise rates from near zero”.
Japanese ten-year government bond yields are currently near 2%. They actually reached 2% on April 18, which was their highest level since August 1999. Several commentators have pointed at market speculation that economic growth may prompt the central bank to raise rates as early as July and again later this year as the reason behind this.
According to Tanigaki, however, the recent gains in bond yields could hurt the Japanese economy, which is still experiencing slight deflation.
Bloomberg also reports that deputy central bank governor Toshiro Muto told the same parliamentary committee that the Bank of Japan hasn’t decided when to raise rates yet.
Since announcing the end of its policy of quantitative easing, the market has been quick in factoring in higher interest rates in Japan. This is despite the Central Bank repeatedly stating any change in official interest rates would be dictated by policy and evidence deflation has finally been beaten.
According to Danske Bank the evidence now exists, as in its view the tightening in the labour market and the falls in excess capacity being experienced are evidence of increasing inflationary pressures.
Compounding this is weakness in the yen and strength in commodity prices, this combination of factors leading the bank to suggest an increase in official rates of 0.25% is likely to happen in September, with a further, similar sized increase likely in the next 12 months.
This has both shorter and longer-term implications, as Danske Bank suggests the current expectations in the market in terms of rate increases are too aggressive and are may be scaled-down in coming months, but looking out the Bank of Japan may in fact lift rates to levels higher than currently expected.
The bank is forecasting official rates of as much as 1.25% by the end of 2007, which should also prove to give strength to the yen in the medium-term.
