The Business Times

BOJ curve-control policy bolstered as US yields fall after Fed

Published Thu, Sep 22, 2022 · 11:02 AM

THE Bank of Japan’s (BOJ) yield curve-control policy has gained some extra breathing space as longer-maturity Treasury yields dropped on Wednesday (Sep 21) due to increasing concern over a global recession.

The BOJ is set to end a 2-day meeting later Thursday after the Fed raised its benchmark by another 75 basis points Wednesday and cut its economic growth projection. A possible decline in Japan’s 10-year yield from the BOJ’s 0.25 per cent ceiling may ease pressures on the central bank to keep buying the securities in a market under liquidity stress.

While Japan’s 10-year bonds have still not traded this week, longer-maturity yields fell after the Fed meeting. Twenty-year yields dropped one basis point to 0.955 per cent, and 30-year yields declined 1.5 basis points to 1.295 per cent.

The functioning of Japan’s bond markets was the worst in 2 years in the 3 months through August due to a global debt selloff spurred by rapid Fed tightening, according to the BOJ’s latest quarterly survey. The period also covered hedge fund attacks on the BOJ’s yield-curve-control policy in June on bets the central bank would have to tweak its policy.

“The BOJ’s stance and its response to market conditions will remain unchanged, whether US yields rise or fall,” said Mari Iwashita, chief market economist at Daiwa Securities in Tokyo. “It will continue unlimited fixed-rate bond buying operations to cap 10-year yields and use scheduled or unscheduled purchases to contain unwanted rises in super-long yields. If US yields fall, the BOJ can just take a wait-and-see stance.”

BOJ purchases

The BOJ spent more than 1 trillion yen (S$9.8 billion) on its fixed-rate bond-purchase operations on Wednesday alone as the nation’s benchmark 10-year yield held at the upper end of the central bank’s tolerance band of 0.25 per cent.

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The BOJ’s massive presence in the Japanese government bond market has caused liquidity to shrink as the central bank tends to boost purchases when yields rise to contain any volatility. Super-long sectors that are outside its yield-curve control have been more vulnerable to global market turbulence, but investors are wary of actively buying amid uncertainty over how high the BOJ will allow them to increase.

The BOJ won’t be fazed if the yen weakens further as a result of its aggressive bond buying, deferring the issue to the Ministry of Finance, which is in charge of foreign-exchange policy, Daiwa’s Iwashita said. “BOJ monetary policy will shift only when the government’s expectation for its role changes.” BLOOMBERG

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