Japan: Look for steepening of JGB yield curve - Nomura

Research team at Nomura expects excess slide in market interest rates in long-term zone could have adverse economic effect for Japan.

Key Quotes

“Looking back at BOJ monetary policy and "comprehensive assessment"

We would describe 2016 as a turbulent year for Bank of Japan (BOJ) monetary policy. Starting with the decision in January to introduce a negative interest rate policy, the BOJ launched yield curve controls and several other ground-breaking policies in 2016. In September 2016 the BOJ also announced a comprehensive assessment of its monetary policy to date. In its comprehensive assessment, the BOJ discusses the impact of its accommodative monetary policy on the underlying economy. Of interest to us is its assessment of the effect of monetary easing in lowering effective interest rates by maturity. Based on this assessment, the BOJ said the effect of monetary easing was greatest for maturities of 1-2 years, and the longer the maturity, the smaller the stimulatory effect on the economy. While it said the extent of the effect varies, the BOJ concludes that reduction of market interest rates via monetary easing has had a positive effect on the real economy regardless of the maturity.” 

“Excess downward pressure on long-term interest rates not necessarily positive for real economy

The policy of buying JGBs, a hallmark of the negative interest rate policy, which is a powerful way of lowering the yield curve, continues to raise concerns about potential side effects. The question we have is whether the BOJ's aggressive lowering of the yield curve has stimulated the economy. We conclude that the policy of lowering market interest rates by buying long-term and ultra-long-term JGBs is not necessarily having a positive effect on the real economy.” 

“We think pressure for the yield curve to steepen could mount

If the BOJ were to take the view that the effect is uncertain of lowering the yield curve via large-scale purchases of JGBs at long-term and ultra-long-term yields, we think efforts to ease at long-term and ultra-long-term yields could be reduced. That said, monetary easing by the BOJ targeting short-term yields has been effective. If the BOJ were to maintain its easing stance in an effort to attain its 2% inflation target, we think it would maintain monetary easing policies that target short-term yields. Based on this view, we think there will be a tendency for the JGB yield curve to come under pressure to steepen via adjustments to the monetary policy stance of the BOJ.”