BOJ ramps up fight to defend yield cap even as weakening yen increases economic risk

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 29, 2022

By Leika Kihara

TOKYO (Reuters) – The Bank of Japan continued its relentless bid to defend a key yield cap by offering to buy unlimited amounts of 10-year government bonds on Tuesday, underscoring its determination to keep policy ultra-loose and putting downward pressure on the Japan’s exercise yen.

The BOJ’s intervention upped the ante for policymakers in the world’s third largest economy as Japan struggles to cope with rising import costs due to a weakening currency and the global fallout from the Ukraine war.

The bond market intervention comes in line with an announcement by the BOJ on Monday that it would offer unlimited bond purchases Tuesday through Thursday to prevent the 10-year Japanese government bond (JGB) yield from rising above an implied 0.25% cap. which she sets around her 0% target.

The BOJ made two offers on Tuesday after the first failed to push yields much lower in the morning. Collectively, the bids received 528.6 billion yen ($4.28 billion) worth of bids.

The 10-year JGB yield came in at 0.245% on Tuesday, hovering near the BOJ’s implied 0.25% ceiling despite central bank intervention.

Some analysts questioned the central bank’s ability to sustain its asset purchases for an extended period of time.

“Theoretically, the BOJ can protect a 25 basis point cap through unlimited fixed rate trades. But at the same time, I don’t think this situation is sustainable,” said Kentaro Koyama, chief economist at Deutsche Bank in Tokyo.

“In the short term, the BOJ can continue purchasing without restrictions. But if the BOJ continues to be challenged by the market, I think that could be the trigger to adjust its yield curve guidance.”

Struggling to swim against the tide of rising interest rates around the world, the BOJ staunchly defended its 0.25% yield cap on Monday with a rare move, allowing twice in a single day to buy an unlimited amount of 10-year JGBs at 0 .25% offered.

The central bank then announced its plan for back-to-back interventions, which will continue through Thursday.

Aside from offering to buy an unlimited supply of 10-year JGBs at 0.25%, the BOJ could also conduct unscheduled buy operations on super-long bonds if yields to maturity rise, analysts say.

“Regarding the direct purchases of JGBs … the BOJ may change the timing and amounts of the purchases as needed, taking into account market conditions,” the BOJ said in its statement Monday announcing its plan for fixed income operations.

The yield curve steepened at the longer end, underscoring the selling pressure JGBs were facing. Yields on 20-, 30- and 40-year bonds all rose to their highest levels since 2016.

Controlling the yield curve, the BOJ leads short-term rates at -0.1% and the 10-year JGB yield at around 0%.


The BOJ’s aggressive efforts to limit yields pushed the yen to a six-year low against the dollar, which could add to the strain on households and retailers by driving up the already rising cost of commodity imports.

In a sign of the government’s growing concern over the yen’s fall, Japan’s top currency diplomat said Tokyo had discussed dollar-yen movements with Washington, and the two sides agreed to communicate closely on currencies.

The yen’s decline is unlikely to stop the BOJ from defending its yield cap, said Toru Suehiro, senior economist at Daiwa Securities.

“The BOJ’s message of avoiding rate hikes is very strong, regardless of the weak yen effect their action could cause,” Suehiro said.

Chief Deputy Cabinet Secretary Seiji Kihara, one of Prime Minister Fumio Kishida’s closest aides, said Sunday the BOJ must maintain its massive stimulus as it struggles to cope with cost-push inflation with policy tightening.

In a sign that fiscal policy will play a bigger role in cushioning rising commodity costs, Kishida on Tuesday ordered his cabinet to put together a new stimulus package.

($1 = 123.4400 yen)

(Reporting by Leika Kihara; Additional reporting by Junko Fujita and Tom Westbrook; Editing by Jacqueline Wong, Shri Navaratnam and Kenneth Maxwell) BOJ ramps up fight to defend yield cap even as weakening yen increases economic risk


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