Following the Cabinet Office’s dialogue with market participants, the possibility that long-term interest rates could reach the mid-3.2% range by year-end was indicated, bringing fiscal concerns and the monetary policy outlook into focus.
The Cabinet Office exchanged views with market participants, including financial institutions, from August through mid-September. Dialogue by the Ministry of Finance’s Financial Bureau and the Bank of Japan’s Financial Markets Department has been conducted diligently, but the Cabinet Office’s initiative is unusual and is viewed as reflecting a communication stance shaped by its experience of the fiscal-policy shock.
The charts show the results of a survey of market participants conducted by QUICK. In the bond survey, 67% cited concerns about fiscal expansion as a factor behind higher long-term interest rates, while 40% cited delays in normalizing monetary policy. In the foreign-exchange survey, concerns about deteriorating public finances, at 48%, were the most common response as the main reason Japan’s long-term interest rates exceeded 3%.
Although the Cabinet Office’s summary and the QUICK survey results have points in common, they differ in the detail of their analyses and the ordering of factors. The Cabinet Office grouped the factors under “the outlook for future policies and other matters” and did not directly specify fiscal concerns or monetary policy.
There remains a view that the market places importance on restoring confidence in fiscal discipline as a backdrop to higher long-term interest rates, and forecasts suggest rates will move toward around the mid-3.2% range by year-end. The news was reported as a reprint from Weekly Financial Affairs.