Japan crossed a financial Rubicon yesterday as the country sold new 10-year bonds with a yield below zero at a government auction.
The sale is the latest sign of a worldwide collapse in borrowing costs which has upended assumptions about the workings of financial markets, as policymakers take ever more drastic steps to stimulate economic growth.
It also highlights the challenge of retaining support for unconventional central bank measures, with Shinzo Abe, the prime minister, struggling to maintain momentum behind his “Abenomics” growth policies.
Disruption and uncertainty created by the Bank of Japan’s announcement of negative interest rates has left 50 per cent of voters dissatisfied with the government’s economic policy, according to a Nikkei poll published this week.
The world’s third-largest economy last month followed Switzerland, Sweden, Denmark and the European Central Bank by cutting short-term interest rates below zero to prevent stagnation and deflation.
The ECB is expected to announce further monetary easing next week, and 10-year German Bunds yield only 13 basis points. Japan is the second country to sell 10-year bonds at a negative yield, after Switzerland became the first in April last year.
The auction — of Y2.2tn ($19.4bn) in 10-year paper, at an average yield of minus 0.024 per cent — means investors have paid a fee to lend money for a decade to the government of Japan, the most indebted G7 nation.
“I don’t think it would be surprising if one day this happened in Germany,” said Peter Goves, European interest rate strategist for Citigroup.
The buying appears to have been almost entirely by dealers and speculators looking to hold the paper for a brief time or covering short sales accumulated in expectation of the yield falling into negative territory. Traders expect much of it to be flipped directly back to Japan’s central bank in a few weeks as part of a bond-buying programme.
Big investors, which include Japan’s biggest pension funds and banks, are understood to have stayed away from the auction as the fund management industry readjusts its strategies for the distortions of a financial environment where negative rates become the norm.
As well as forcing wholesale adjustments to the structure of many investment products, analysts at Nomura have warned that the Japanese government bond market could now be prone to regular phases “where fair prices are no longer obvious”.
Analysts described the sale as the latest in a string of “inevitable distortions” that have descended on Japan since the BoJ revealed its negative rates policy on January 29.