Foreign investors are concerned over weak global growth and are now moving from equities to sovereign bonds including Japanese Government Bonds as a safe place to park their money. Recently, the Bank of Japan has also accelerated its bond-buying efforts. The growing demand for bonds raised its prices, lowering yields that move inversely to prices.
Japan’s benchmark 10-year yield fell to a record low 0.255 percent. And the yield on the five-year government bond hit zero for the first time. Japanese Government 10-year bonds are now the lowest-yielding in the world after Swiss bonds, where five-year yields are negative at -0.157 per cent. Japan’s yield curve is expected to flatten further; longer-term yields will be pushed lower.
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Low oil prices are positive for Japan, one of the worlds largest importers of Oil. The price of Brent, the international benchmark of oil, has declined to $47 a barrel, down around 60% from $115 in June 2014. It will improve Japan’s deteriorating trade balance. Japan’s trade deficit is estimated to drop by $100 billion a year if oil stays around $50 a barrel. Japan has experienced trade deficits every month since June 2012. Oil at six-year low will support Yen which has been sliding over the last three years.
The latest U.S. economic report suggests Federal Reserve is unlikely to lift rates in near future. This also led to appreciation in the Japanese yen and demand for JGBs. The Swiss National Bank’s decision to introduce negative interest rates on bank deposits caused some people to move into JGBs. Yen is currently trading at 117 yen a dollar, 3 percent stronger since reaching 121.85 on December 8, the weakest level since July 2007.
However, a slide in oil prices heightens concerns about slowing inflation or even deflation in Europe and elsewhere. While lower oil price is beneficial to Japan, it may hurt oil exporting countries. It may affect investment and global growth.
The drop in the price of oil is positive for oil consumers in Japan. It is good for industries as well as individuals. Goods may become cheaper and individuals will likely save more but it will bring down inflation further. The Bank of Japan’s target of two per cent inflation will become even more difficult to achieve.
People in Japan are also apprehensive about the comeback of deflation, which Japan struggled to combat for nearly two decades. After 2½ decades of economic stagnation and deflation, Japan emerged from the recession only in late 2012. It attracted investments from global financial markets but it was short-lived. The Japanese economy contracted at 0.5 per cent in the third quarter after plunging 1.9 percent contraction in the second quarter. This pushed Japan, the world’s third largest economy, into recession. It has created an atmosphere of instability and uncertainty.
Last month, the government announced a fresh fiscal-stimulus package of a 3.5 trillion yen ($29 billion) plus a corporate tax cut. It is hoped that the current package will help the countryside local economies, small businesses and households, besides funding infrastructure and public-works. This was the third fiscal stimulus package in the last two years to reactivate the recession-hit economy. The first fiscal boost was worth 10.3 trillion yen in 2012, and the second worth 5.5 trillion yen in April 2014. The measures such as fresh stimulus package and tax cuts are expected to encourage economic activity in Japan.
The author, Kanchan Kumar, is an MBA in Finance and MS in Statistics and has served as Executive Director and Advisor with several multinational companies, Financial Institutions and Universities. He writes on Global Economy, Market and Personal Finance.