Long-Term Bond Rate Dips Below Zero
The yield of 10-year Japanese government bonds (JGB) dipped below zero on Tuesday for the first time ever.
When the bond price goes up, the yield goes down. And growing uncertainty with the global economy has got investors running for hard assets and fixed income investments like Japanese government bonds.
Long-term interest rates have been on the decline since the Bank of Japan decided on a negative-interest-rate policy late last month.
It's causing the rally in the bond market as many banks will rather park their money in JGBs than keep it at the central bank where they will continue to lose money.
Japan's Financial Services Minister says the government will carefully monitor the effects of falling long-term interest rates, including the impact it will bring on banks and other financial institutions.
Taro Aso says lower long-term rates are a double-edged sword. He says they cut borrowing costs on housing loans on the one hand, but reduce returns on bank deposits on the other.
"The government and the Bank of Japan will continue to steer the country's economy in the right direction in an effort to pull the country out of deflation, while taking full note of the bond markets," Aso told reporters. "And we need to keep an eye on financial institutions through inspections and supervision."
The yield on 10-year JGBs serves as a benchmark that affects borrowing costs. So it's relevant to everyone from business owners who need bank loans for equipment to people who want a mortgage to buy a home.
In 1990, Japan's booming economy pushed rates above 8 percent. But then the asset bubble burst. The central bank kept easing its monetary policy, and long-term interest rates continued to drop.
At one point in 1998, a year after Yamaichi Securities went bankrupt, long-term rates dropped to about 0.6 percent. After that, they hovered between 1 and 2 percent.
In April 2013, Haruhiko Kuroda took over as Governor of the Bank of Japan and launched a massive credit easing program. Rates tumbled to 0.315 percent, a record low at the time.
Late last month, the bank's policymakers did something they've never done before. They introduced a negative interest-rate policy. That sent long-term rates plummeting to 0.09 percent on the same day.
NHK WORLD's Kyoko Fujita has an in depth view of the recent developments and looks at the causes.
The confusion in the Japanese market on Tuesday actually started from concerns overseas.
The main concern is the US economy. A weak company earnings report on top of fewer new job creations than expected has frightened investors.
Investors are now thinking the US Federal Reserve will not be able to raise interest rates as was hoped.
That in turn has caused investors to seek safe havens for storing their money. A safe haven is seen as a low risk investment. It can be in currencies or government bonds.
So some international investors looked to the Japanese yen for safe investment, which is why the yen has increased in value against the dollar.
Here in Japan, a stronger yen is scaring company managers. The unexpected stronger yen could affect corporate earnings for exporters.
Investors reacted quickly. They cashed out their stocks one after another to avoid losses. But this in turn caused stock prices in the Nikkei index to plunge.
Investors were then in search of a safe place to put their money. So they decided to buy Japanese government bonds.
But here's what happened: The price of the bonds rose because so many investors bought them. The prices actually went so high, investors will not be able to get a return on their investments.
All this caused the rate for long-term government bonds to drop below zero.
"Investors fear another slowdown of the global economy," says Ayako Sera, a market strategist at Sumitomo Mitsui Trust Bank. "The biggest problem here is that there is no attractive place to invest money."
Uncertainties over the world economy are driving investors to avoid taking risks.