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JPMorgan Rows Back on Fear That All Markets Are ‘Japanizing’

John Ainger
·2-min read

(Bloomberg) -- While the threat of Japanification hangs over some of the world’s biggest markets, there’s little chance of it happening in the U.S., according to analysis by JPMorgan Chase & Co.

Unlike the U.K. and euro area, America is still far away from the chronic forces that have characterized Japanese markets during the past several decades, the New York-based bank said in a note dated Sept. 18. The catalysts are the ultra-loose monetary policies, yet they’re affecting some markets less than others.

The Federal Reserve’s ability to complete a hiking cycle after the great financial crisis built conviction that the U.S. is still some way off from rates that stay low indefinitely, according to the analysis. JPMorgan modeled various bond yield curves across the world, taking into account where the lower bound for interest rates were in each region and their future prospects, and compared them to Japan’s.

“Taking policy rates to zero with strong forward guidance is only a necessary condition in the road to Japanization of the yield curve,” wrote strategists Fabio Bassi and Antoine Gaveau in a note to clients. The U.S. “is furthest away as the market attributes maximum credibility to the Fed in its reflationary exercise,” they said.

One of the characteristics of Japanification is that central banks become an increasingly dominant player. In Japan, there have been days where not a single government bond has traded, and monetary institutions elsewhere are also buying up bigger shares of the market. The European Central Bank’s pandemic stimulus program, for example, scrapped the 33% cap on purchases of the predecessor program.

One of the key questions following the coronavirus crisis is the outlook for inflation across developed markets, given how much stimulus has been pumped into the economy. Currently, traders are far more expectant of prices rising in the U.S. than they are in Japan or Europe.

That phenomenon is also reflected in government bond yields. While Japanese 10-year yields are hovering just above 0% and Germany’s are about 55 basis points below that, the U.S.’s comparable rate is still at around 0.66%.

(Updates prices in final paragraph.)

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