Abenomics' massive monetary stimulus was supposed to depress long-term interest rates to spur economic activity, but the Japanese government bond market has other ideas.
Banks, unable to make money on their Japanese government bonds (JGBs) anymore, have begun sloughing off their holdings, putting upward pressure on yields. Major banks sold off about 11 percent of their holdings in April alone.
Large lenders have hiked their prime rates to make up for the loss of earnings on JGBs, which threatens to price potential borrowers out of the mortgage market, while higher long-term rates could sap corporate Japan's already anaemic demand for loans.
That puts at risk the very activity Prime Minister Shinzo Abe had intended to spark with the Bank of Japan's massive quantitative easing (QE) on April 4, when it promised to inject $1.4 trillion into the economy over two years.
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"QE policy doesn't mean just buying more government bonds. Buying more bonds is just a tool, a means to achieve lower interest rates," said Takuji Okubo, chief economist at Japan Macro Advisors.
"QE is also convincing the market that yields will stay low, and the Bank of Japan is not doing the latter," he said.
The yield on the benchmark 10-year JGB is still very low both historically and compared with other sovereign debt.
But it has jumped about half a percentage point from the record-low 0.315 percent reached the day after the BOJ unveiled its radical plan to double the monetary base over two years to achieve 2 percent inflation. At one stage in recent frenetic trading, it reached 1 percent.
The plan's rationale was that the intense burst of monetary stimulus would drive down interest rates, as the central bank bought an amount equivalent to about 70 percent of new issuance each month.
Instead, after a brief tumble, rates began to rise as banks and other investors sold JGBs, worried they were holding assets that would lose value as the promised inflation emerged.
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