BOJ’s coming battle to keep rates low to bring big shorting opportunity in JGBs

Last Thursday’s big announcement that BOJ will begin buying more longer-dated bonds to keep rates from rising, was largely overshadowed by headline inflation numbers in the US which once again surprised the markets on the upside. However, we think given the inflationary backdrop, BOJ has potentially plunged itself into a losing battle of trying to maintain its zero-interest rate policy (ZIRP) while long term rates in the US and EU head higher.

We think BOJ’s buying intervention will be viewed as huge selling opportunity for JGB holders and macro investors alike. This will also most likely further pressure the yen to weaken as rate differentials widen, raising import prices that have already hurt Japan’s real incomes. All this are unlikely to go down well with the current political establishment who are facing another big vote in the Upper House elections later this year and Kishida’s early popularity as Japan’s new PM is fizzling out. 

As we have long argued Kuroda’s monetary experiment of the last 10 years as the BOJ chief, has largely failed and besides weakening the yen that have helped Japan’s bigger multinationals (thus, its stock market), it has done little else. ZIRP has even hurt Japan’s banks and pension funds by destroying lending margins and thus discouraging lending and generally removing any decent returns at home, leading them into more speculative investments elsewhere. 

Indeed, most policy makers are exhausted with BOJ Chief’s ineffective and unorthodox monetary policies, now more associated with the heavy lifting for Abenomics which is also deemed an outdated framework. Should Kuroda’s policies create new headaches for Kishida’s government, the end to his long tenure as BOJ chief could come even sooner. Come what may, BOJ’s latest decision to draw the line in the sand in terms of its long-term rates tolerance should ultimately bring about a big payday for macro funds.