Wednesday, August 18, 2010

Bank of Japan to Ease Further? 2-year JGB Yield Approaches Overnight Rate

The yield on Japan's 2-year JGB is approaching 0.1%, which is the interbank overnight call rate (無担保コール翌日物, equivalent of the Fed Funds rate) that the Bank of Japan uses to guide the monetary policy, according to Nikkei Shinbun citing Reuters Japan (the linked article is in Japanese). The last time the yield of 2-year JGB was at this level was September 2005.

Both the Japanese stock market and bond market are up. What's driving the markets is the expectation that the Bank of Japan will soon announce further easing - more open market operations and lowering the overnight call rate. The analysts cited in the article say that if it is going to be just the expansion of the open market operations, the markets will be disappointed. According to them, today's bond market action is pricing in the further lowering of the overnight call rate, which is already at 0.1%.

Will further easing stop yen from going higher? That's what they are hoping, driving both the stock market and the bond market up.

How low could the overnight rate go? Maybe we will be seeing the first instance of a negative rate in one of the biggest economies... (Sweden has done it, but it was on the deposit rate - charging banks to keep funds at the central bank.)


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