The yen, which surged to a two-month high against the dollar today, will resume its slide over time because of differences in monetary policies between the two economies, Japan’s biggest bank lobby said.
Japan’s currency and stocks will remain unstable “for a while,” Japanese Bankers Association Chairman Takeshi Kunibe said at news briefing in Tokyo today after shares plunged. At the same time, yields on government bonds “have settled to a considerable extent,” he said.
The Bank of Japan is deepening monetary easing at a time when U.S. Federal Reserve policy makers debate a reduction in monthly bond purchases. Kunibe said he expects central bank Governor Haruhiko Kuroda to stick with his policy of buying bonds to end more than a decade of deflation.
Japan’s economic recovery is “getting on a firmer footing,” Kunibe said, even after the Nikkei 225 Stock Average (NKY) entered a bear market today, sliding more than 20 percent from a May 22 high.
The yen touched 93.79 per dollar, the highest since April 4, before trading at 94.19 as of 5:39 p.m. in Tokyo. The Nikkei 225 closed down 6.4 percent. Yields on benchmark 10-year government bonds fell 1.5 basis points to 0.855 percent.
Kunibe said he expects bond yields to increase gradually as the economy improves.
“It’s natural for yields to gradually rise in reflection of an economic recovery,” said Kunibe, who is president of Sumitomo Mitsui Banking Corp., a unit of Japan’s second-biggest bank by market value. “As we go through this normalization period we have to bear in mind the risk that yield moves become excessively unstable and increase risks of holding JGBs.”
Volatility in the Japanese government bond market since April has raised concerns among investors and analysts that lenders may incur unrealized losses on their holdings. Banks have been trying to reduce their exposure to JGBs by trimming their stockpiles and holding shorter-term notes.
Ten-year yields swung between a record low of 0.315 percent on April 5, the day after Kuroda unveiled his plan to double the monetary base, to as high as 1 percent last month.
The central bank this week refrained from expanding its tools to address bond-market volatility, leaving unaltered a one-year, fixed-rate loan facility it tapped seven times since April.
“The BOJ is continuously making efforts to stabilize the JGB market through communication and operations,” Kunibe said.
In the U.S., Treasury yields have jumped in the past month as some Fed officials have said the central bank could slow its asset purchases. Chairman Ben S. Bernanke said on May 22 that the Fed could consider reducing its monthly bond purchases within “the next few meetings” if officials see signs of sustained improvement in the labor market.
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