In a recent report from MUFG, Derek Halpenny discusses the heightened intervention risks in Japanese financial markets due to the ongoing sell-off in Japanese Government Bonds (JGBs). The report highlights concerns about the weakness of the Japanese Yen (JPY) and its potential impact on market stability, especially in light of the Bank of Japan’s recent interest rate hike.
Intervention risks rise amid sell-off in Japanese government bonds
“The big move in Japanese financial markets today was in the Japanese government bond market rather than the yen, with the 10-year Japanese government bond yield reaching a high of 2.10% before retreating modestly but still up 6 basis points from Friday’s close and the highest since 1999.”
“Friday’s currency market reaction to the Bank of Japan’s decision to raise interest rates by 25 basis points to 0.75% clearly illustrates concerns about an overly cautious approach to raising interest rates in conditions of still-high inflation and additional fiscal stimulus scheduled to support the economy in the first half of next year.”
“Financial market instability is the biggest risk to the Takaishi government, especially a continuing bout of yen weakness since this is likely to impact the government’s approval rating, which remains high following the election of Takaishi’s leadership.”
“What investors want to see is an acknowledgment from the government that they recognize these risks and will therefore act more cautiously on fiscal policy.”
“Given these current risks and uncertainties, currency market intervention is unlikely to succeed without a signal from the government on appropriately managing fiscal policy risks. If this is not revealed in Friday’s budget announcement, the JGB bond sell-off could extend alongside another decline in the yen.”
