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Since last year, Japan has emerged from a long phase of “zero inflation”, or even deflation, that has been in place for over twenty years. According to the latest available data (July 2023), Japanese inflation over a sliding 12-month period has now reached 3.3%, and even 4.3% excluding fresh products and energy (core inflation). There is a strong correlation between the macro-economic data and Japan’s 10-year bond yield, which has risen significantly over the past year.
Unlike the Fed and the ECB, the Bank of Japan (BoJ) has yet to raise its key rate, which has remained at -0.1% since 2016 despite the return of inflation. Nevertheless, the feeling of relatively sustainable inflation has made it possible the Bank of Japan (BoJ) to consider gradually phasing out its ultra-accommodative policy.
For several months, the central bank has been gradually relaxing its control of long-term rates. After capping the 10-year rate at 0.25%, the BoJ raised this level to 0.5% in December 2022, and then to 1% in July 2023. This summer, markets immediately reacted to this announcement, with the rate rising from 0.45% to 0.60% within a few days. To avoid any risk of overheating, the central bank intervened on July 31 by purchasing 5-year and 10-year government bonds on the markets for a total of 300 billion yen (about 2 billion euros). Since then, the 10-year rate has stabilized at around 0.65%.
Faced with the prospect of persistent inflation, the raising of the ceiling on Japanese long-term rates is set to continue. In a second phase, the BoJ may consider raising its short-term rates. While allowing the market more leeway, the BoJ remains highly committed to controlling the level of Japanese interest rates.
Written on September 8, 2023. This is not an investment advice. Opinions subject to change.
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