Bank of Japan steps into debt market to slow rising bond yields

BUSINESS

Bank of Japan steps into debt market to slow rising bond yields

The Bank of Japan headquarters in Tokyo. The central bank announced an emergency bond-buying operation on Wednesday after the 10-year Japanese government bond yield hit a new decade high. | Bloomberg

By Yumi Teso and Masahiro Hidaka
Bloomberg

Oct 18, 2023

The Bank of Japan announced an unscheduled bond-purchase operation on Wednesday, 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%, a fresh decade high. Japanese government bonds have faced renewed pressure amid a selloff in U.S. Treasurys, 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 July 28 to make the program more flexible. Some investors saw the July tweak as a move toward ending the negative interest rate policy as inflation remains above the BOJ’s 2% target.

The BOJ is likely to discuss raising its inflation projection for fiscal year 2023 and 2024 at this month’s meeting, according to people 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. “U.S.-Japan yields are correlated to a certain degree and there’s no sign the U.S. 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% after declining from 0.815% before the BOJ’s move. The yen stayed near the psychological level of ?150 per 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.”