Volatility of Bond Market

It was a consequence predicted from the beginning. Two weeks after the announcement of negative rate policy by Bank of Japan, Tokyo Bond Market marked historical low in interest rate. The interest rate for newly issued ten-year national bond was temporarily dropped to -0.035% on Tuesday, recording the minus rate for the first time. Turmoil in the market seemed to be going out of the range that BoJ expected.

Negative rate policy was introduced for providing more money to the market. Investors kept on buying national bond after the announcement of BoJ Governor, Haruhiko Kuroda, causing lower interest rate. While exchange of ten-year national bond started at 0.040% on Tuesday, the rate declined as low as -0.035% and finished the exchange of the day at -0.025%.

What does that mean? Suppose a case that an investor buys a national bond, which has ¥100 yen of face value with annual interest rate of 3%, at the price of ¥105. The investor will receive ¥103 a year later. But, he/she will lose ¥2, because he/she purchased at ¥105. That lost is the consequence of negative rate. Investors were active in buying national bonds, expecting BoJ, which would keep monetary easing, to buy those bonds with higher price.

Some commercial banks introduced the lowest long-term prime rate for private corporations. Housing loan is renewing its lower record of its rate. It is possible for Japanese government, which has issued a great amount of national bond to support national budget, to pay less interest than ever. But, families will be reluctant to deposit their money to the bank. The banks will have serious problem for maintaining their income through rending money.

Flattering of market, however, must be out of calculation for BoJ. The central bank introduced negative rate policy for stabilizing psychology of investors, who had been worrying about volatile situation of international economy. But, world trend was worse than what BoJ expected. Not only Chinese but American economy was affected by persistent decline of oil price. Geopolitical risks keep on emerging. Japanese national bond became a safe have for investors, making them rushing in Tokyo market.

Tokyo Stock Market showed steep down on Tuesday, dropping Nikkei Average by ¥918. For a bad news for Japanese exporters, Japanese yen rate against U.S. dollar hiked to ¥114 against $1. Political leaders kept on calming the public down. “Lower rate will positively affect for Japanese economy with lower rate in housing loan, stimulating more investment,” said Chief Cabinet Secretary, Yoshihide Suga. But, the unusual move of the market indicated lowering credibility on Abenomics.