Bank of Japan steps into debt market to slow rising bond yields
The Bank of Japan (BOJ) announced an unscheduled bond-purchase operation on Wednesday (Oct 18), reminding the market of its determination to slow the pace of increases in sovereign yields.
The operation had no immediate impact on the benchmark 10-year yield, which earlier in the day touched 0.815 per cent, a fresh decade high. Japanese government bonds (JGB) have faced renewed pressure amid a sell-off in US Treasuries, and as traders test the BOJ’s tolerance in the lead-up to a monetary policy meeting on Oct 30-31.
The central bank stepped into the debt market three times prior to Wednesday’s action with unscheduled operations after adjusting yield-curve control on Jul 28 to make the programme more flexible. Some investors saw the July tweak as a move towards ending the negative interest rate policy as inflation remains above the BOJ’s 2 per cent target.
The BOJ is likely to discuss raising its inflation projection for fiscal year 2023 and 2024 at this month’s meeting, according to sources familiar with the matter.
“It is difficult for the BOJ to stop the upward trend in yields with the bond-purchase operation,” said Kazuya Fujiwara, fixed income strategist at Mitsubishi UFJ Morgan Stanley Securities. “US-Japan yields are correlated to a certain degree and there’s no sign the US yields are peaking out, which drags domestic yields higher as well.”
Bond futures trimmed a drop slightly after the announcement. The 10-year yield remained at 0.81 per cent after declining from 0.815 per cent before the BOJ’s move. The yen stayed near the psychological level of 150 per US dollar, trading at 149.75.
“The BOJ was behind the curve in containing JGB yields going higher,” said Shoki Omori, chief desk strategist at Mizuho Securities in Tokyo. “Looking at JGB futures, when additional operation was announced, it trimmed loss but dropped again, indicating foreign investors may be challenging the BOJ now.” BLOOMBERG
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