BOJ Acts to Slow Rising Bond Yields With Unscheduled Buying

The Bank of Japan announced an unscheduled bond-purchase operation Friday in a reminder to the market of its determination to manage the upward momentum in sovereign yields.

(Bloomberg) — The Bank of Japan announced an unscheduled bond-purchase operation Friday in a reminder to the market of its determination to manage the upward momentum in sovereign yields.

The buying clipped half a basis point off the benchmark 10-year yield, which earlier set a fresh decade high. Japan’s 30-year yields reached a peak last seen in 2013 and the 20-year maturity touched the highest since 2014 on Thursday amid a selloff that’s hitting bonds around the world.

The BOJ’s purchase of ¥300 billion ($2 billion) of five- to 10-year bonds was relatively small and not strong enough to bring a big reduction in yields, according to Katsutoshi Inadome, senior strategist at Sumitomo Mitsui Trust Asset Management. A larger operation would have run the risk of hurting the yen, which has been trading near the 150 level versus the dollar.

Japan’s unease with currency’s weakness has been on display all week, with finance ministry officials repeatedly warning that all options are on the table to arrest a sharp slide. The yen strengthened 0.3% to 148.80 at 4:07 p.m. in Tokyo, trimming a second straight monthly drop that’s been driven by the widening yield gap with the US.  

Japan’s bonds are set to mark the biggest quarterly rout in more than two decades. While the BOJ was stepping in Friday to manage the speed of the moves, the broader picture in the minds of investors is the central bank positioning for an eventual shift to normalize monetary policy.

“The big implication of this unscheduled bond-purchase operation on Friday is that the BOJ tells the markets not to challenge the central bank,” said Shoki Omori, chief desk strategist at Mizuho Securities Co. “The BOJ will be committed to control the yield curve unless the decision is changed.”

The central bank stepped into the debt market after the yield on 10-year notes climbed to 0.77%, the highest in a decade. But the benchmark rate may climb much further, some analysts say. It might rise to around 2% if the BOJ’s goal of stable 2% inflation is realized and it ends its negative interest rate policy, said Toshitaka Sekine, a former research chief at the central bank.

The 10-year yield will reach 1.25% by the end of next year, Tomonobu Yamashita and Shusuke Yamada, Bank of America strategists, wrote in a note Thursday. They cited inflationary pressure in Japan, a potential worsening in the demand-supply balance of government bonds, and the outlook for a weaker yen as factors.

Japan’s sovereign notes have lost 3% in the third quarter, the biggest drop since 1998, according to Bloomberg-compiled data. The plunge underscored how the nation’s debt is partly reliant on support from public-sector institutions like the Bank of Japan to post strong gains.

The nation’s sovereign notes sank 6.2% in the final quarter of 1998, the biggest loss in Bloomberg-compiled data going back to 1987, after the finance ministry said back then that it would stop outright purchases of long-term government bonds on behalf of post office savings and public pension fund. 

This time though, the tumble in sovereign notes is happening globally. Government debt outside Japan has slumped 4.6% during the third quarter, the most in a year, Bloomberg-compiled data show. Yields on 30-year US Treasuries are poised to rise the most for a quarter since 2009.

Speculation has been mounting that Japan’s central bank needs to let interest rates rise to help narrow the yield gap with the US, which is driving yen weakness and spilling over with negative economic impact.

BOJ Governor Kazuo Ueda has said uncertainties regarding the outlook for wage gains and inflation remain high, and therefore the BOJ believes its goal of achieving 2% inflation accompanied by wages gains “has not yet come in sight.” 

Friday’s bond-purchase plan follows two unscheduled operations since the BOJ tweaked its yield-curve control program on July 28 to allow 10-year yields to rise to as high as 1%. The yield on 10-year debt fell back to 0.765% following the announcement.

–With assistance from Masahiro Hidaka.

(Adds bond yield forecasts.)

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