Japan's real cost of long term borrowing has dropped below zero, bringing an end to years of high real rates and marking a milestone for "Abenomics".
Negative real interest rates are a key feature of Shinzo Abe's war on deflation, which aims to encourage bond heavy investors to seek higher returns through stocks, loans or property, or buying assets overseas.
Such portfolio rebalancing is expected to feed into higher prices, as banks begin to chase growth at home and as institutions such as life assurance companies swap JGBs for foreign bonds, undermining the Yen. Inflation also erodes gross government debt, which now stands at 240% of GDP.
Data on Friday showed that Japan's core consumer price inflation index rose from 0.7% in July to 0/8% in August pushed up mostly by higher costs for imported fuel. Meanwhile the benchmark 10 year government bond yield sank from just over 0.8% to 0.72%.
That means that investors long bonds during August were losing money in inflation adjusted terms. That is the first time that this has happened in Japan since summer 2008, when fuel prices pushed core CPI as high as 2% while 10 year bonds were yielding about 1.5%.
As portfolio rebalancing plays out, the Bank of Japan has promised to take up the slack, ramping up bond purchases to keep nominal interest rates as low as possible.
Since April, when new governor Haruhito Kuroda announced a shift to a new phase of "quantitive and qualitative monetary easing", the BOJ has been mopping up about JPY7.5tn of bonds a month, equivalent to about 3/4 of coupon bearing debt issued.
Source - FT 1 October 2013