BOJ might want keeping super-long sector steep to minimize side effects – Deutsche Bank

Makoto Yamashita, Strategist at Deutsche Bank, notes that the last week's speeches by BOJ Governor Haruhiko Kuroda and Deputy Governor Hiroshi Nakaso both discussed the ongoing "comprehensive assessment" of QQE+NIRP and characterized the pluses and minuses in very similar fashion, for which reason they might be considered indicative of the BOJ "consensus".

Key Quotes

“Negative side effects appear to have stemmed solely from declines in longer-term rates, with lower short-end rates essentially of no relevance to diminishing returns on insurance and pension products or the rising net present value of retirement benefit liabilities. As such, the BOJ will probably see a need to prevent any further easing from generating too much downward pressure on super-long JGB yields. If the BOJ does indeed want to maintain a comparatively steep yield curve, then its next easing move will probably be accompanied by the adoption of a more flexible approach to bond-buying operations.

Domestic investors last week became net sellers of foreign bonds for the first time in roughly two and a half months. We attribute this to a reduction of risk exposure amid Fed rate hike concerns, but do not see it as the start of a sustained trend. Japanese life insurers continue to buy up foreign bonds at a record pace. Rising USD borrowing costs are of course hindrance, but we expect to see further flows into USTs given that (1) long-term yields appear to have room to decline and (2) a comparison of 10y-forward 20y rates with Japan and Europe shows the UST curve remaining relatively steep.”