Rich Privorotsky, head of trading at Goldman Sachs, believes that current pressures on long-term interest rates have become globalized: weaker economic data can push down short-term rates, but long-term bonds may still remain under pressure. Japan is perhaps the clearest example of this contradiction: the yield on Japanese 10-year government bonds has risen to about 2.94%, reaching a 30-year high, and the market is also pricing in faster tightening by the Bank of Japan.
Japan currently wants to maintain economic and stock market growth, stabilize the exchange rate, continue fiscal expansion, and control the yield curve. But Privorotsky believes these goals are becoming increasingly incompatible. Fiscal expansion and higher nominal growth will push up long-term interest rates, but more aggressive central bank tightening will increase pressure on the economy and financial system.
His assessment is that Japan may eventually need to accept stronger monetary tightening, but after decades of deflation, this path is politically and structurally difficult.
The Japanese market is anticipating a more general problem: when fiscal expansion and capital demand continue to rise, the central bank's control over long-term interest rates will significantly decrease.
