Service Sector In Japan Worsens: Yields Near Limit, BOJ Face-Off With Bond Traders
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Author: Mr. Amar – Technical Analyst

Japan’s service sector sentiment index fell in January for the first time in five months, according to Cabinet Office, taking a hit from curbs to stem a record rise in coronavirus infections. They stated that workers such as taxi drivers, hotel workers, and restaurant staff, called “economy watchers” for their proximity to consumer and retail trends, showed their confidence about current economic conditions dropped about 20 points to a five-month low of almost 38 in January.

With that being said, Japan’s government bond yields are edging toward the upper limit of the central bank’s tolerance level, setting the stage for it to intervene with the first unscheduled debt purchases in two years.

The BOJ’s response will determine whether Japan can defy the worldwide rise in yields as traders ramp up bets for policy normalization. Governor Haruhiko Kuroda has dismissed talk of a rate hike and domestic inflation remains anemic but the global repricing is still altering expectations for Japan’s bond market.

Given that inflation remains far below the central bank’s 2% target and wage growth is subdued, a shift in policy doesn’t seem imminent, though market expectations look to be shifting. Alternatively, the BOJ could use its scheduled buying operations to adjust the shape of the yield curve if it sees distortions.