The divine tailwinds

The Japanese word kamikaze translates literally as “divine winds.” 

Last Monday, the Bank of Japan (BoJ) announced that it would cut its bond buying program, an initiative which has been the hallmark of BoJ policy since Governor Haruhiko Kuroda took office in 2013. We estimate that it will decrease bond purchases by $46 B – out of the program’s yearly target of $736 B – across four major maturities. It also said that it might totally stop buying bonds with maturities over 25 years. Clearly, the BoJ is looking to steepen the yield curve by concentrating its purchases in the short end, in an attempt to counter the flattening that began a year ago. This flattening was exaggerated by investors looking for a quick buck, knowing that they had a supportive tailwind in the form of the BoJ. 



Even though this is not a game changer on paper, the signal that it sends had major market effects. So much so that we think the BoJ’s move may have been a financial kamikaze. A day after, it conducted a 10-year bond auction which turned out to be its worst in three years.  Knowing they may no longer have the BoJ at their bank, buyers barely showed up, and the bonds were priced well-lower than where they were trading just minutes before. The sell-off had a major contagion effect in Europe and Americas, driving yields up across the world. It seems that without BoJ support for long-dated bonds, the divine tailwinds are no longer at the backs of Japanese long-bond buyers. And if long term investments are no longer good enough for a central banker, why would institutional investors care for them too?

Jean-Guy Mérette

Vice President and Portfolio Manager
Active and Strategic Fixed Income Team