Yield Curve Rising in Japan

Although the BOJ announced to buy longterm JGB's the yield curve is getting steeper in Japan.

What does that mean?

Well, it depends on how you see interest rates working its way into the real economy.

• if you see interest rates as the key variable for economic growth ===> rising interest rates (especially on the long end) are negative for economic growth. That's the textbook mechanism of interest rates tought in the Universities. Higher interest rates ==> refinancing for companies gets more expensive ==> on a DCF basis projects become less profitable (break even for investments rises; NPV sinks) ==> fewer (expansion) capex ==> contraction in economy

•  if you see interest rates just follow economic growth (expectations) than ===> growth (expectations) rise ==> higher interest rates; no clear cut between good or bad for economy; cause: higher growth ==> higher cash flow (for companies); positive effect counterbalanced by higher refinance cost + higher discount factor ==> trade- off 

•  Generally: one has to form an opinion about if interest rates determine the outcome of the economic activity, or if it is the other way around (==> reflexivity)

• if one comes to the conclusion that latter is the case ==> one has to form an opinion on what effect will overcompensate the other