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BOJ surprises with offer to buy 400b yen of bonds

Move marks a shift away from the Japanese central bank's usual strategy of conducting a fixed-rate unlimited bond-buying operation


THE Bank of Japan is showing just what it means by being flexible with bond purchases. The central bank unexpectedly offered to buy 400 billion yen (S$4.9 billion) of five-to-10-year bonds on Thursday to stem a selloff that saw the 10-year yield touch an 18-month high of 0.145 per cent earlier in the day.

Traders have been testing the limits of the BOJ's patience since it said on Tuesday it would allow the yield to go as high as 0.2 per cent.

The operation was all the more surprising as the BOJ has said it would avoid debt purchases on the day that the government sells securities of the same maturity.

It also marked a shift away from the central bank's usual strategy of conducting a fixed-rate unlimited bond-buying operation.

A sale of 10-year bonds auction earlier Thursday drew a tepid response from investors. "The BOJ needed to slow the pace of advance in the 10-year yield, but probably wanted to wait until it reached 0.2 per cent to step in with a fixed-rate operation," says Takenobu Nakashima, senior rates strategist at Nomura Securities Co in Tokyo. "The move suggests more similar operations may come."

Governor Haruhiko Kuroda's tolerance for wider fluctuations in the yield has shattered the calm in Japan's market, with 10-year government debt futures sliding by the most in almost two years on Wednesday - a move that prompted an emergency margin call from the clearing house.

Repercussions are being felt far beyond Japan's shores, with yields in the US and Germany rising.

The BOJ accepted 400.3 billion yen of bids at Thursday's operation, after having received 1.27 trillion yen in total, it said in a statement.

Japan's 10-year yield reversed its advance and was down 0.5 basis point at 0.115 per cent as at 4.50pm in Tokyo. It climbed six basis points on Wednesday.

Even so, analysts said that the market will be keen to push towards the 0.2 per cent mark. That means the BOJ may be forced to conduct a fixed-rate operation, adding to the three it held in the week before its policy decision on July 31.

"The market will want to test the Bank of Japan again to see if the benchmark 10-year bond yield can rise to 0.2 per cent," said Hidenori Suezawa, chief bond strategist at SMBC Nikko Securities Inc in Tokyo. "The BOJ acted this way today to let the market know it can move very flexibly."

The immediate focus shifts to the central bank's regular bond-purchase operation on Friday, where it is scheduled to buy debt with maturities of five-to-10 years, 10-to-25 years and that due in more than 25 years.

The BOJ has been conducting "stealth tapering" by slowly cutting bond purchases over time. It added slightly less than 50 trillion yen worth of government debt to its balance sheet in the year through March, much lower than its publicly-stated target of expanding the monetary base by 80 trillion yen annually.

"Today's operation leaves a question mark on the central bank's communication with the market," said Toru Suehiro, senior market economist at Mizuho Securities Co in Tokyo. "The BOJ is taking too much risk", as buying bonds on the day of an auction is usually seen as problematic, he said. BLOOMBERG

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