Why Japan Bond Market Swings Aren't So Wild

CNBC

The Bank of Japan's nonchalant approach towards recent volatility in the government bond market has left investors feeling let down, but a look at historical yields could tell you just why the central bank isn't panicking yet.

"The [10-year Japanese government bond] yields at 85-90 basis points are exactly in line with the full year average of 2012. We're hardly in unexplored or dangerous new territory here," Michael Kurtz, global head of equity strategy at Nomura, told CNBC Asia's "Squawk Box" on Wednesday. Over the past decade, Japanese government bond (JGB) yields have averaged 1.3-1.4 percent, he added.

While 10-year JGB yields briefly rose to 1 percent in late-May, they have since fallen back into the 0.8-0.9 percent range. The concern for investors is that a rapid rise in bond yields could significantly increase the interest payment burden for the highly indebted government. Japan's government debt is estimated to reach 245 percent of gross domestic product this year - the highest in the world.

(Read More: Should the Bank of Japan Have Done More? )

Kurtz, however, is unconcerned about the implications of recent moves in bond yields from the point of view of the government's fiscal situation or the balance sheets of the country's financial institutions, which are large holders of sovereign debt.

"Yields haven't taken us into territory that's either going to be particularly damaging for the financial system balance sheets, nor are we in a situation where government finances seem to be under particular material threat from the current level of JGB yields," he said.

A month of large swings in Japan's equity and bond markets had raised investor expectations that the BOJ would announce measures to calm the volatility at its policy setting meeting on Tuesday.

(Read More: BOJ to Consider Steps to Calm Bond Market )

However, investors were met with disappointment when the central bank kept monetary policy, voting unanimously to maintain its pledge of increasing base money at an annual pace of 60 trillion yen to 70 trillion yen ($600-700 billion).

This sent the benchmark Nikkei 225 swiftly lower and the yen higher against the U.S. dollar. The Japanese currency has strengthened to the 96 level against the greenback on Wednesday - gaining almost 6 percent over the past two weeks.

According to Kurtz, the central bank should be commended for sticking to its guns. "Let's give [BOJ Governor Haruhiko] Kuroda some credit here, I think he needs to stand fast and say that the BOJ is not going to be pushed around by every whim of the market,"

(Read More: Major Structural Reforms in Japan Unlikely, Says Mr Yen )

Uwe Parpart, chief strategist and head of research at Reorient Financial Markets agreed, adding that with JGB volatility petering out in the recent days, the Bank of Japan was right to stand pat on monetary policy.

"The volatility has actually decreased over the past several trading days. Over the weekend, [yields] stopped at 0.83 percent, we are up 4 basis points - that's not a big deal. I'm not concerned this is going to derail the market in any significant way," he said.

Discussing market expectations for the central bank to increase the maturity of its fixed-rate loan facility to two years from one year to help curb volatility in the longer end of the yield curve, he said, "I think people raise expectations and talk them up, and when they don't happen they get disappointed. Well too bad for them. It's not the BOJ's fault. I think they are doing the right thing."

In a press conference following the BOJ's policy decision on Tuesday, Governor Haruhiko Kuroda left the door open to extending the duration of its fixed-rate market operation, but said there was no "imminent need" for a new tool at the moment.

(Read More: Bank of Japan Keeps Policy Steady, Upgrades View of Economy )

By CNBC's Ansuya Harjani



More From CNBC

Rates

View Comments (0)