BOJ offers four days of unlimited bond purchases to defend yield cap

FILE PHOTO: A man wearing a protective mask walks past the Bank of Japan headquarters amid the outbreak of the coronavirus disease (COVID-19) in Tokyo
FILE PHOTO: A man wearing a protective mask walks past the Bank of Japan headquarters amid the outbreak of the coronavirus disease (COVID-19) in Tokyo, Japan May 22, 2020. REUTERS/Kim Kyung Hoon

March 28, 2022

By Leika Kihara

TOKYO (Reuters) – The Bank of Japan struggled to swim against the tide that was sending interest rates higher around the world, staunchly defending its 0.25% yield cap on Monday by offering to offer a yield cap for the first four days of this week Buy unlimited amount of government bonds.

The BOJ’s defense of its ultra-loose policy pushed the yen to a six-year low of 124 against the dollar on Monday, adding to the problems facing the Japanese economy amid already rising fuel and commodity import costs.

Under pressure from a steady rise in yields, the BOJ launched its defense by making two offers to buy unlimited amounts of 10-year Japanese Government Bonds (JGB) at 0.25% in a single day.

The central bank then said it would make the same unlimited offer for the next three days to ensure investors got the message loud and clear, but some economists believed the central bank’s grip on yield curve control was threatening to slip .

“The power of the BOJ’s unlimited bond-buying bid is clearly waning,” said Takahide Kiuchi, a former central bank board member who is now an economist at the Nomura Research Institute.

“Markets could test the BOJ’s resolve to defend the 0.25% cap more, which could prompt the bank to change its approach and let the 10-year yield continue to rise.”

The BOJ’s first open-ended bond-buying offer this morning couldn’t prevent the 10-year JGB yield from hitting a six-year high of 0.250% on Monday — the level the bank has set as an implied cap around its yield target.

The central bank made a second offer in the afternoon to buy unlimited JGBs with maturities longer than five years and up to 10 years.

While the first bid did not result in any bids, the BOJ accepted bids to purchase 64.5 billion yen ($524 million) worth of JGBs in the second bid.

The two offers, the first since Feb. 10, underscored the BOJ’s determination to keep interest rates extremely low in contrast to the Federal Reserve’s aggressive rate hike plans.

The BOJ then announced a plan to buy unlimited 10-year JGBs at 0.25% for three consecutive days starting Tuesday, using the most powerful weapon in its arsenal to defend its return target.

“Markets are testing the BOJ, so the central bank has no choice but to continue offering unlimited asset purchases,” said Takafumi Yamawaki, head of Japan Fixed Income Research at JPMorgan Securities.

“If yields are allowed to surge above 0.25%, investors will think the BOJ has tolerated a rise above that level. That makes it harder for the BOJ to continue yield curve control.”

Under Yield Curve Control (YCC), the BOJ pledges to guide the 10-year JGB yield by 0% as part of an effort to stimulate the economy by keeping borrowing costs low.

The BOJ’s current forecast is that it will allow the 10-year yield to flex around its 0% target as long as it stays below the 0.25% cap, although it will not only break the level but also rate of increase in returns.

BOJ Governor Haruhiko Kuroda has repeatedly stated that the central bank will keep interest rates at current ultra-low levels given the fragile economic recovery and inflation remaining well below its 2% target.

Mounting complaints from politicians about the weak yen inflating Japan’s already rising import costs could complicate the BOJ’s efforts to keep yields extremely low, analysts say.

The dollar is up over 7% against the yen in March so far, its biggest monthly gain in over five years.

The BOJ is in a dilemma. By capping interest rates at zero, it is fueling the yen’s decline, which could hurt the economy by raising costs for households and businesses.

“Too frequent offers to buy bonds indefinitely can cast doubt on the viability of yield curve control,” said Shotaro Kugo, an economist at the Daiwa Institute of Research.

“It could also draw unwanted public attention to the weak yen, so the BOJ probably wants to avoid intervening too often.”

($1 = 123.1200 yen)

(Reporting by Leika Kihara; Additional reporting by Kantaro Komiya, Daniel Leussink and Takahiko Wada; Editing by Shri Navaratnam, Stephen Coates and Simon Cameron-Moore) BOJ offers four days of unlimited bond purchases to defend yield cap


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