The BoJ is considering slowing the pace of tapering of its bond purchases next fiscal year, in response to the recent selloff and heightened volatility in superlong JGBs. Super-long JGB yields spiked to records last month, but have since fallen back, after it became apparent that the BoJ would look to slow the pace of tapering. The MoF is also looking to reduce issuance of superlong bonds and boost short-term debt sales in a bid to stabilise yields, as demand for superlong bonds diminishes.
Under Janet Yellen the U.S. Treasury also increased the share of bills issuance to stymie rising yields, against a backdrop of a deteriorating fiscal picture, and elevated inflation. Such moves can, in the short run, help to bring down yields. However, by alleviating some of the immediate pressure on policymakers, the tough decisions required to bring down deficits are postponed further and further into the future. In the end, the fiscal outlook continues to worsen, and eventually superlong bond yields will begin to rise again, running contra to the initial aims of such policies.
The most effective way to cap the rise in long-dated bond yields, would be to tighten fiscal policy materially, to achieve a more sustainable fiscal footing. But in the absence of tighter fiscal policies, and the necessary structural investments required to improve the supply side, inflation targets will be breached with more regularity and real yields will have to be higher. With core inflation in Japan accelerating even further above the BoJ’s target, and with the labour market remaining tight, it may not be too long before the bond selloff resumes.
