Japan yields tumble to well below policy cap as BOJ stands pat

Japanese government bond yields tumbled, falling the most in two decades at one point on Wednesday (Jan 18), retreating sharply from the central bank’s 0.5 per cent ceiling after policymakers decided to keep yield curve controls in place.

The 10-year yield plunged as much as 14 basis points to 0.36 per cent at its lowest point, which would have been the biggest one-day decline since September 2003, before edging back up to 0.41 per cent as of 0733 GMT. The yield was at 0.51 per cent prior to the Bank of Japan decision.

Anticipation had been high that BOJ Governor Haruhiko Kuroda and his colleagues would change tack at Wednesday’s meeting, with expectations ranging from further tweaks to yield curve control (YCC) to complete abandonment.

Ten-year JGB futures jumped when they resumed trading following the midday break, trading up as much as 1.81 points to 146.65, the highest since Dec 20. They had dipped to 144.15 on Friday, the lowest since March 2014.

“If they had expanded the band again or terminated YCC, yields would rise, which would be a de facto rate hike for a second consecutive meeting,” said Naomi Muguruma, senior market economist at Mitsubishi UFJ Morgan Stanley Securities. “That’s not the intention of the policy board.”

The BOJ also made use of a newly announced policy tool immediately, offering five-year loans to financial institutions to enhance liquidity, and showing its resolve to keep yields low.

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The yen retreated as much as 2.6 per cent to 131.58 per dollar on Wednesday, reversing a rally that was driven by bets BOJ stimulus was on the way out, which had pushed Japan’s currency to its highest since May.

Japan’s Nikkei 225 share average closed the day with a 2.5 per cent rally, its best performance since Nov 11.

While it has been only a month since the BOJ doubled the allowable band for the 10-year yield around its 0 per cent policy rate - ostensibly to improve market function - the change had emboldened speculators to test the bank’s resolve.

The 10-year yield has breached the BOJ’s ceiling in each of the past three trading sessions, only to close back at the 0.5 per cent limit each day. On Friday, it spiked to a 7½ year peak of 0.54 per cent.

Taming yields has come at a cost, with the central bank splashing an unprecedented US$78 billion on bond buying operations on Friday and Monday, calling into question the sustainability of the programme.

At the post-meeting press conference, Kuroda defended the change, reiterating that widening the yield band has made YCC “fully sustainable”. He added he didn’t see any “special risk” associated with the BOJ’s recent increase in bond purchases.

Signs that ultra-easy monetary policy may not be needed for much longer have come from consumer inflation, which in the most recent data for Tokyo was double the 2 per cent target, and from early indications from corporate Japan that stubbornly slow-to-rise salaries may also take off.

“Inflation dynamics are changing gradually, and the necessity to keep the current uber-accomodative monetary policy framework is declining,” said Masayuki Kichikawa, chief macro strategist at Sumitomo Mitsui Asset Management.

“Still, there is no reason to remove it in a rush.” REUTERS