With the Bank of Japan’s Yield Curve Control (YCC) policy targeting a 0% 10-year JGB rate, fixed income strategists had an easy time forecasting that part of the curve. In 2018 they might be taking shorter lunch breaks.
The prevailing assumption that the BoJ will continue to target the long-end of the curve until inflation reaches its 2% target is out the window. In a speech last week, Governor Kuroda discussed the notion of a “reversal interest rate”—a situation where if the central bank lowers interest rates too far, banks’ capital constraints tighten through narrower net interest margins. This, in turn, impairs banks’ ability to lend and therefore leads to a situation in which lower rates act as a contractionary force.