(Bloomberg) -- Investors who were burned in the aftermath of the Bank of Japan’s July board meeting appear unwilling to accept its recent signaling on interest rates, with the swaps market pricing only about a one-in-three chance of a hike this year.
That’s in contrast to a majority of economists — who expect the central bank to make another move in December — and to messaging from BOJ policymakers themselves, who have hinted they’ll increase borrowing costs if their outlook for prices is met.
“My conversations with hedge funds and traders indicate that while they see the possibility of a rate hike this year, the degree of conviction has dropped since the market turmoil at the beginning of August,” said Naka Matsuzawa, chief strategist at Nomura Securities Co. in Tokyo.
“This is reflected in overnight index swaps,” said Matsuzawa, who predicted the BOJ’s July rate hike. He now expects the central bank to wait until April before moving again.
Swaps price in no chance of a hike by the conclusion of this week’s meeting on Friday, around 6% by the Oct. 31 decision and just 38% for the final decision of the year on Dec. 19.
The BOJ’s July rate hike was only predicted by about 30% of central bank watchers as their base-case scenarios, and the plans announced for cutting bond buying were more aggressive than some market forecasts over a two-year period.
The ripples from this filtered through global markets immediately, soon colliding with a shift in the US rates outlook and then washing back into Japan. The turmoil reached a crescendo on Aug. 5, when Japan’s Nikkei-225 Stock Average slumped 12%.
“It was like being in an elevator and the cables suddenly being cut,” Tatsuki Nagano, president of All Nippon Asset Management Co., said of the events of that day.
It’s that kind of sentiment which has investors wary now, even after BOJ members have indicated repeatedly over the past month that further hikes are on the horizon if their economic and price forecasts are being realized.
“The OIS market is correct,” said Tadashi Matsukawa, head of fixed income at PineBridge Investments Japan Co. “Economists tend to follow the data, and inevitably their decisions tend to lag behind.”
The yield curve for Japanese government bonds shows a similar level of skepticism about any hike from the BOJ this year, with a significant narrowing in the spread between two-year and five-year maturities.
All Nippon Asset’s Nagano added that the yen’s recent appreciation was hurting Japanese equities and that ruling party lawmakers who had pushed for the BOJ to normalize its stance while the yen was weak would now be cautious about monetary policies that push down stock prices.
“With the sense of uncertainty being extremely strong, the BOJ doesn’t need to rush,” he said.
--With assistance from Hidenori Yamanaka.
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