Japan’s key yield rises above BOJ cap on policy tweak bets

JAPAN’S benchmark yield briefly rose above the central bank’s ceiling for the first time since its January meeting, as traders continued to bet on further policy tweaks.

The 10-year yield climbed to 0.505 per cent, before erasing its advance. Investors are readying to hear from Kazuo Ueda, the nominee for the Bank of Japan (BOJ) governorship, who will face confirmation hearings in parliament on Friday (Feb 24).

Ueda, an economist and a former BOJ board member, is not known as either a strong dove or a hawk. But speculators are betting that the BOJ’s cap on bond yields will eventually have to be scrapped, regardless of who the next governor is, as the policy tool looks increasingly unsustainable.

Ayako Sera, a market strategist at Sumitomo Mitsui Trust Bank, said that the higher yield was driven by “speculation of a change to yield-curve control”.

“Should the BOJ change policy abruptly like it did in December, bonds would tumble, so there’s a sense of caution in the market,” she added.

In December, the BOJ doubled its policy ceiling to 0.5 per cent to improve market functioning, but it ended up buying more government bonds to defend the new cap. It pushed back against intensified speculation for more adjustments at the January gathering, by keeping policy unchanged and doubling down on its defence of the yield-curve-control program.

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Yields on two- and five-year notes outpaced the rise in the 10-year rate on Tuesday, as they rose 1.5 basis points each. The 10-year yield rose as much as 0.5 basis points.

“Some investors may be concerned that Ueda may hint at a future removal of the negative-rate policy,” said Ataru Okumura, a rates strategist at SMBC Nikko Securities in Tokyo. “These investors may be preparing for any situation that they could face.” BLOOMBERG