BoJ chief says stimulus working
As consumer prices stagnate, the Bank of Japan is pointing to falling inflation-adjusted yields as evidence its stimulus program is lifting expectations for living-cost increases.
Japan's 10-year government bonds yield a negative 0.55 percent when adjusted for the expectations included in inflation-linked debt prices, while the similar measure for the U.S. is a positive 0.46 percent. Since the start of the year, projections for inflation over the next decade have climbed 19 basis points, while estimated real yields for the period have fallen 12 basis points, according to data.
BoJ Governor Haruhiko Kuroda last month emphasized the effect of monetary policy on inflation expectations and real yields as he reiterated confidence in reaching a 2 percent inflation goal. That suggests he will stick to the current level of stimulus, even as the central bank's preferred gauge of consumer prices has flat-lined this year.
"Remarks about the decline in real yields have been on the rise because the BOJ wants to emphasize the effectiveness of quantitative easing," said Kazuhiko Ogata, a Tokyo-based econ- omist at Credit Agricole SA. "They seem to be struggling to show their policies are working." The BoJ's stimulus, which has scope to snap up every new bond the government issues, is pushing down nominal yields to the lowest globally after Switzerland. The 10-year bond yield slumped as low as a record 0.195 percent in January, and was at 0.39 percent as of 3:13 p.m. Tuesday in Tokyo. The equivalent US Treasury note yielded 2.16 percent.
Even as break-even rates have climbed this year, core consumer prices, which strip out food costs and the effects of last year's consumption tax hike, have hovered between zero and gains of just 0.2 percent since January following oil's biggest plunge last year since the financial crisis. Kuroda reiterated that underlying prices continue to improve steadily and no additional stimulus is needed at this time, in an interview with the Yomiuri newspaper on July 31. He repeated his view that price gains would accelerate significantly later this year. "By focusing on inflation expectations instead of actual inflation, the outlook appears much better," said Hideo Kumano, an economist at Dai-ichi Life Research Institute Inc. in Tokyo.