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Businessweek
The Big Take


JAPAN’S MARKET ROARS BACK TO LIFE—WITH OLD-TIMERS LEADING THE WAY

After decades of setting its benchmark rate near zero, the BOJ is poised to
tighten, spurring new opportunities for veteran traders.

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By Ruth Carson, Takashi Nakamichi, and Hidenori Yamanaka
January 17, 2024 at 1:00 AM GMT+1
Corrected
January 17, 2024 at 8:08 AM GMT+1
BookmarkSave

日本語版: 息吹き返す日本市場、求む80－90年代知るベテラン－プラス金利に備え

Suddenly, it’s exciting to be a trader in Japan again.

The Japanese central bank is widely expected to put an end to the world’s last
negative interest rate in the next few months. And after decades of humdrum
predictability, the world’s third-largest government bond market is buzzing, the
benchmark stock index has hit a 34-year high, and brokerages across Tokyo are
staffing up—often seeking out older traders who remember when Japan last had
positive rates.



The broader economic and societal impact of the shift is still some time away
for most of Japan. But on its trading floors, the new era—with its echoes of the
past—is already here. “I was getting close to what the financial industry sees
as the retirement age,” says rate-swap broker Tadashi Masumoto, who’d expected
to downshift to a slower professional gear ahead of the birth of his fourth
child a couple of years ago.

Instead, the former chief executive officer of Tullett Prebon (Japan) Ltd.
received a flurry of job proposals, and he recently started working as a
managing director running a new Japan-based yen interest-rate swap team for
Nasdaq-listed brokerage BGC Group Inc. “It’s really gratifying for someone of my
age to receive an offer or be approached for jobs,” says Masumoto, 54.

Expand

MasumotoSource: Tadashi Masumoto

Market veterans such as Masumoto have become a hot commodity as financial
institutions seek experts with the know-how to survive in a world of rising
rates. For three decades, the Bank of Japan has kept short-term rates anchored
near zero; as a result, few traders are familiar with the extreme price swings
that can arise when there’s a sustained increase in borrowing costs.

In recent weeks, BOJ Governor Kazuo Ueda has sought to lay the groundwork for
the nation’s first rate rise since 2007, and some analysts predict he’ll make
his initial move in April. Inflation that’s been running over the central bank’s
2% target for more than a year and a half is reinforcing the case for a less
accommodative stance, and the BOJ has tweaked its yield-curve control policy
three times in just over a year.



“The massive Japan rates market is sort of coming back alive,” says Ville
Vaataja, a former JPMorgan Chase & Co. trader who last year set up a macro fund
targeting Japan’s interest-rate market. “We strongly believe that for years and
decades ahead, we will have a structurally higher realized volatility.”

Japan has a shortage of suitable bond trading staff to deal with future market
conditions, according to a BOJ surveyBloomberg Terminal that points to the
possible impact of an expected central bank policy shift.

Expand

Call loan brokers at Tokyo Tanshi Co.Photographer: Toru Hanai/Bloomberg

The changing outlook is bringing more international investors back to Japan as
Chinese assets—once a must-have in global portfolios—are becoming less
attractive. With the BOJ cutting back on bond buying, investors look set to
again become a significant force in government debt. And market watchers expect
some of the $4 trillion that left Japan in search of higher rates abroad in
recent decades to start returning home as the central bank tightens.



Some caution that the shift may turn out to be less exciting than anticipated.
Mari Iwashita, chief market economist at Daiwa Securities Co., says that while a
pickup in prices is likely to prompt the BOJ to scrap its negative rate in
April, the central bank won’t raise borrowing costs above zero anytime soon.
“The 10-year yield may rise temporarily as a reaction to the removal of negative
rates, but it is unlikely to stay above 1% for a long time,” she says.



Even the anticipation of a shift, though, has Japan’s financial institutions
racing to hire experienced personnel, helping boost compensation, with some
traders getting guaranteed bonuses and sharp increases in base salary. One
yen-rates trader at the vice president level got an offer topping 30 million yen
($205,000) a year—about 5 million yen more than the traditional upper range for
someone of that rank, according to Yoshiki Kumazawa, financial services
recruitment director at Morgan McKinley Group Ltd. “We are starting to see
offers that jump a notch,” Kumazawa says. “Competition for human resources is
getting lively again—something we haven’t seen for some time.”

Even people with decades on the job barely remember a time when rates were
rising. Masayuki Koguchi, executive chief fund manager at Mitsubishi UFJ Asset
Management and a 25-year veteran in asset management, says he’s never even
worked with a benchmark rate at the relatively modest level of 1% to 2%, so he’s
grateful for the handful of people in the office who’ve been around longer than
he has. “We have some veterans who have been in the market since the 1980s,”
Koguchi says. “We are sharing and discussing the market movements during that
era.”

Expand

The Tokyo Stock Exchange in 1985.Photographer: Kaku Kurita/Gamma-Rapho
Expand

Tokyo traders taking a break in 1987.Photographer: Benoit Gysembergh/Paris
Match/Getty Images

Market veterans welcome the return to the days when trading floors were bubbling
with energy. In the 1980s, billion-dollar bond trades weren’t unusual, and
yields often seesawed wildly as the 10-year yield soared as high as 8.69% in
1990. “In the old days, lunch breaks were as long as two hours, and even on
weekdays, everyone drank beer and sake with colleagues,” says Hidenori Suezawa,
62, an analyst at SMBC Nikko Securities Inc. “Trading was always brisk in the
afternoons, partly because of the momentum of the drinking.”



All that changed in the late 1990s, when the BOJ slashed borrowing costs to zero
in an attempt to revive Japan’s stagnating economy. The central bank went
further in 2016 by enacting its yield-curve control program, which allowed it to
scoop up large amounts of sovereign securities to keep borrowing costs low.

As a result, the BOJ dominates Japan’s government debt market, owning 53.9% of
the country’s $7 trillion in government bonds at the end of September. Ten-year
bond yields are hovering near 0.60%, and the benchmark note isn’t even traded on
some days.



But from January to November last year, the average monthly turnover in Japanese
government bonds jumped 41%, to 29 trillion yen, from the same period two years
earlier. Volumes in shares listed on the Tokyo Stock Price Index climbed 25% to
69 trillion yen over the same period, while foreign-exchange margin trading
soared 94%, to 978 trillion yen.

Barclays Plc’s Japan entities say they’re getting more yen-rates-related orders
from home and abroad, with many overseas institutional clients betting that
local interest rates will rise. Concordia Financial Group Ltd., one of Japan’s
biggest regional lenders, says it’s been hiring people and nurturing young
employees through trainee programs to help manage its 3 trillion-yen securities
portfolio. Ken Griffin’s hedge fund, Citadel, is planning to set up a Tokyo
office more than a decade after closing up shop there.



Exchange operators are adapting to the changing environment, with the Tokyo
Financial Exchange in March 2023 adding new three-month interest-rate futures
partly because of the prospect of a change in BOJ policy, says Ryosuke Seo,
director for the wholesale business department. He expects positive rates to
push futures trading volume to tens of thousands of contracts a day, up from a
daily average of 1,570 in October. “Customer interest grew larger after the
listing of the new rates futures,” Seo says. “Investors who showed no interest a
year ago have started to contact us.”

Expand

NishiPhotographer: Toru Hanai/Bloomberg

And traders and money managers who do recall more volatile times say it’s smart
to prepare, because when things start to change, they’ll change quickly.
Yasumasa Nishi, a former head of Mizuho Financial Group Inc.’s market unit,
likens the current period to awaiting a typhoon. You think it’s coming, but you
can’t be sure how bad it’s going to be or exactly when or where it will
hit—something the 70-year-old knows well from his younger days in his family’s
lumber business. “There were those who bought lumber before the typhoon hit and
boarded up their windows and roofs,” Nishi says. “There were the others who
bought timbers after the typhoon hit to repair damaged houses.”

— With assistance from Taiga Uranaka, Masaki Kondo, Yumi Teso, and Kurumi Mori

(Corrects the title and company name in the broker photo caption, from
government bond traders at Central Totan Securities.)

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