BOJ Word Analysis Suggests Bond Bears to Face Disappointment

(Bloomberg) -- Investors betting Bank of Japan’s review next month will lead to higher bond yields may need to cool their ardor, at least according to an analysis of the language used recently by policy makers.

A Bloomberg text analysis of official BOJ communications, turned into a sentiment gauge, fell into negative territory in January after a one-month positive spell. That suggests policy makers may still be cautious about attempting to coax bond yields higher, lest it trigger tighter financial conditions that smothers the nascent economic recovery.

Since the BOJ announced a policy review in December, speculation has been growing that officials will slow down bond purchases to let the benchmark 10-year yields fluctuate in a wider range. The 30-year yield has risen to a two-year high and Finance Minister Taro Aso warned Tuesday about losing the trust of the market, saying the possibility of a sudden jump in yields isn’t zero.

Previous instances when the sentiment gauge fell into negative territory coincided with periods of monetary easing from the BOJ, such as at the height of concerns about the coronavirus last year, and in 2016 when it introduced a yield-curve control policy in a fresh bid to kick the economy out of a deflationary spiral.

Apart from briefly moving above zero in December, the gauge has been negative since March 2020.

“There is no chance” that the BOJ will actively seek to further steepen the yield curve, said Kazuhiko Sano, chief strategist at Tokai Tokyo Securities Co. “There is a risk that markets will be disappointed given so much speculation.”

Downside Risks

In its latest policy statement last month, the BOJ lifted its growth and inflation forecasts for fiscal 2021, though it expressed a gloomier view on the state of the economy. Governor Haruhiko Kuroda said Tuesday he remained cautious on the economic outlook and that downside risks remained.

Unlike the reflation hope sweeping the U.S., there is no sign traders expect a return of inflation in Japan. Five-year breakevens -- a gauge of future inflation -- traded at just 0.01% on Monday, and consumer prices fell 1.2% year-on-year in December.

Still, data Monday showed Japan’s economy clocked another quarter of double-digit growth and finished the pandemic year in better shape than initially expected.

Methodology

The BOJ sentiment indicator is based on the number of positive and negative words used in the central bank’s policy statements, monthly and outlook reports, summary of opinions and meeting minutes going back to 2010. It is calculated by subtracting the share of negative words from that of positive ones, normalizing the resulting figure and comparing it to prior readings.

A Z-score reading below zero would indicate the proportion of negative words used is larger than the historical average.

The methodology is the same as the one used by Reserve Bank of Australia researchers to measure sentiment in news reports. Determining whether a word is positive or negative is done using the Loughran and McDonald sentiment word list, the approach also used in the RBA paper.

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