Monday, June 24, 2013

Will there be a crisis in JGB market?

I was preparing a graph of recent long-term interest rate movements for my conference presentation in NZ. So I picked up the episodes of the sharp increase in the long-term interest rates in recent years. The following numbers and the picture of long-term Japanese government bond (JGB) rates are based on the Nikkei JGB index for seven to eleven year maturities:

- 0.550% in six days from Nov to Dec 1998
- 0.234% in seven days in June 2003 (so called “VAR shock”)
- 0.685% in 8 days in August 2003
- 0.388% for 14 days in April 2008

The interest rate surge in last month, May 2013, was 0.290% in six days or 0.353% in 10 days. Therefore, it was not particularly large as a rise in one week. The rise in April 2008 was even larger for the change over two week period. Given the fact that the long-term JGB rate had gone down for nearly 0.3% in the first three months of 2013, there is no surprising at all to see the increase of this magnitude in the long-term JGB yield.

Fussing about a potential crisis in JGB market in current market environment is ridiculous, but that is exactly some media and pseudo economists on web are doing right now. Japanese government and the Bank of Japan also reacted too seriously to all those nonsense by making rather pathetic comments such that “we are committed to keep the interest rate low and stable.” They should have instead said “We don’t worry. Within the expected range.” Things has becomes unnecessarily complicated because authorities reacted unnecessarily nervously.

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