Even before the Japanese equity market weakness entered the radar we had seen some huge spikes up on JGBs and it was the likely brief move above 1.00% on 10-year yields that ultimately weighed on Japanese stocks. The volatility on JGBs started soon after the BoJ unleashed its QE plans on April 4.
There was certainly a communication problem but there was also a lack of a firm commitment to bring down the volatility on JGBs. All that we saw from Governor Kuroda is a view that the higher yields were natural as the economy recovers. Indeed the impression being given is that the threshold for action won’t come until we see much higher JGB yields – maybe as high as 1.50%.
Those holding JGBs do so because they are risk averse and the volatility on JGBs and stocks provides them with nowhere to hide. Things would have been different had we just had the volatility on JGBs and a rising stock market as these investors would have been tempted into taking on more risk.
Increasing QE (frequency and size) should be delivered but it should not look to reverse the recent movement on JGB yields. The higher JGB yields serves a purpose and this is to slow the pace at which investors shift from safety/liquidity and into risk.
We might find that when a year has passed the BoJ ends up doing more than the ¥50tn in debt annually that it intends to purchase.