Japan’s below zero rates complicate BOJ’s efforts to kick-start growth, end deflation


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Driving interest rates below zero, the Bank of Japan has turned a comatose government bond market into an enormous free-for-all, complicating the central bank’s own efforts to kick-start growth and end deflation.

The $9 trillion market for Japanese government bonds had been all but paralyzed since the BOJ began a massive monetary easing three years ago that made the bank the dominant buyer.

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But in the two months since the BOJ announced it was imposing a negative interest rate, JGBs have become a volatile commodity, with prices swinging wildly as below-zero yields confound investors’ attempts to find fair market value.

“The JGB market is really in a bubble, when you think about it as an investment vehicle,” said Takuji Okubo, chief economist at Japan Macro Advisors in Tokyo. “Their prices have moved away from fundamentals, and people don’t have a traditional way to measure their value.”

As the BOJ’s dominance distorts bond market functions and dries up liquidity, the central bank could have a hard time tapering its buying binge when it eventually chooses to exit its “quantitative and qualitative easing” program.

The bank theoretically could just sit on its enormous holdings until the bonds mature, but policymakers are unlikely to want those assets to remain on the balance sheet for decades. On the other hand, it might be difficult to smoothly taper off its asset purchases, much less sell its holdings.

So far, the BOJ’s money printing has kept the cost for financing the government’s massive public debt very low. A spike in that cost could stoke market fears Japan may be losing control of its finances, potentially triggering a damaging bond sell-off, some analysts say.

“It would be quite tough for the BOJ to taper such an enormous balance sheet without disrupting markets,” said a person familiar with the BOJ’s thinking.

In the meantime, buying bonds that yield less than nothing is creating losses for the exchange-listed BOJ – not an immediate worry for the government but a potential risk to confidence in the guardian of the yen.

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