Everyone is asking when the "bond market storm" will end? In this sensitive moment, the Governor of the Bank of Japan speaks out: We will maintain an accommodative policy!

On Friday, Federal Reserve Chairman Powell's speech at Jackson Hole failed to calm the bond market storm that has been ongoing for weeks. On Friday's close, the US 5-year real yield, i.e., the yield on 5-year inflation-protected securities (TIPS), rose above 2.26%, reaching a new high since 2008. The yield on the benchmark 10-year US Treasury bond remains at a high level of 4.24%. Amidst the bearish sentiment in the bond market, the Bank of Japan reiterated its accommodative stance. Bank of Japan Governor Haruhiko Kuroda, who attended the Jackson Hole Symposium, stated that the pace of price growth in Japan is still below the central bank's target, and the Bank of Japan will continue to implement its current ultra-loose monetary policy. "We believe that the potential inflation rate is still slightly below the 2% target, which is why we adhere to the current framework of accommodative monetary policy. The year-on-year increase in the Consumer Price Index, excluding fresh food, is 3.1%, and we expect the inflation rate to decline by the end of the year." As the only developed country that has not raised interest rates in the past eighteen months, the cheap and liquid Japanese yen is at the core of carry trades. The potential policy shift by the Bank of Japan is also one of the reasons for the collective rise in global government bond yields (once the Bank of Japan shifts its stance, Japanese investors' funds will flow back to the domestic market in large quantities). Therefore, every move by the Bank of Japan is closely watched by global market participants. Last month, the Bank of Japan relaxed its control over the yield curve control (YCC) program but denied that it meant the Bank of Japan would move towards normalization. However, Governor Kuroda is actually facing significant pressure to support the exchange rate of the Japanese yen, and market expectations for the Bank of Japan to tighten its stance are increasing. Just as Powell was delivering his speech on Friday, the USD/JPY exchange rate fell to 146.6, the lowest level since November last year. Tomasz Wieladek, Chief European Economist at T Rowe Price, believes: "Given the resilience of the Japanese economy and the recent unexpected rise in prices in the services PMI, I believe that the Bank of Japan will face greater pressure to accelerate the pace of tightening monetary policy to prevent yen depreciation." Since the Bank of Japan adjusted the YCC in July, the benchmark JGB yield has been slowly rising, increasing by 0.03% last week to reach 0.66%. Mark Dowding, Chief Investment Officer at RBC Bluebay Asset Management, told the Financial Times: "We believe that higher inflation rates will prompt the Bank of Japan to adjust its forecasts at the next quarterly monetary policy meeting... This could be a prelude to the Bank of Japan announcing victory over deflation and abandoning yield curve control." "We believe this will push the 10-year bond yield up to 1.25%. Prior to this, we expected the Japanese bond yield to continue rising." Christian Abuide, Head of Asset Allocation at Lombard Odier, explains that "the rise in Japanese government bond yields will accelerate the selling of bonds in other major markets, as Japanese investors with large amounts of funds will repatriate their capital." "With the increase in yields, domestic institutional investors have a growing incentive to bring their funds back home, selling foreign bonds and investing in Japanese government bonds." In addition, Goldman Sachs analysts stated in a report released last week: "While there are many factors driving global interest rates higher, I believe the most important factor is Japan. As a colleague put it: the Japanese government bond market is huge... it hasn't moved for a long time... now it's in motion. Therefore, I suspect that what starts in Japan is likely to end in Japan." A Deutsche Bank study shows that "as of the end of 2022, Japanese investors hold over $2 trillion in foreign long-term bonds, including a significant amount of government bonds from major developed countries such as the United States, France, the Netherlands, and Germany." The market widely expects that the rise in bond yields will accelerate the trend of Japanese investors selling overseas bonds, and this shift has already begun due to the surge in currency hedging costs.