The Bank of Japan said it would buy an unlimited amount of bonds on Friday, as it sought to put a lid on domestic interest rates pushed higher by the broad sell-off in developed market bonds. Its aggressive bond buying operation sent most Japanese government bond yields lower and weakened the yen. It also marked a reversal in the recent slow and stealth tapering of the bond buying operation central to its easy monetary policy.
“The BOJ has sent a very strong signal that they are committed to the yield curve control policy and they are not coming to the global tightening party. The reward has been a lower currency,” said Ray Attrill, head of FX strategy at NAB in Sydney.
The BOJ’s announcement followed a spike in 10-year Japanese government bond yields to 0.105 percent, its highest since early February and significantly higher than the zero percent it targets for that maturity under its yield-curve-control policy. The spike was in parallel to the steep rise in German, U.S. and other European bond yields over the past week and a half, spurred by concerns global central banks are moving toward reducing stimulus.
It had its origins in a string of hawkish messages from the European Central Bank, the Bank of England and the Bank of Canada, furthered on Thursday by minutes from the European Central Bank’s latest meeting showing it could be open to scrapping its bond-buying pledge. The Federal Reserve’s policy meeting minutes this week suggested it may also soon begin paring back its large bond holdings in the coming months.
To ensure it had a stronger buffer in case increased buying was not enough, the BOJ employed its most powerful weapon — of unconditional buying at specific yield — only for a third time after it started its yield curve control policy in September. In a special market operation on Friday, the BOJ offered to buy an unlimited amount of 10-year JGBs at a yield of 0.110 percent. It also boosted the size of its regular auction-based purchase of five to 10-year maturities to 500 billion yen from the previous 450 billion yen.
“The BOJ showed its strong determination to keep the 10-year yield around zero percent and not to let it rise above 0.10 percent,” said Koichi Sugisaki, strategist at Morgan Stanley MUFG Securities. Following the BOJ’s operation announcement the 10-year yield fell to 0.085 percent while expectations of widening in yield differentials with other countries sent the yen down to 113.835 to the dollar, its lowest in a month and a half.
But Friday’s increase in bond buying went against the central bank’s attempts in recent months to reduce its massive debt purchases. The BOJ has been slowing the pace of its bond buys as its holdings of JGBs have already topped 40 percent, threatening the smooth functioning of the bond market.
Former BOJ board member Sayuri Shirai told Reuters on Friday the Bank of Japan should steadily proceed with an “implicit tapering” of its bond purchases as any rise in yields would be temporary. Shirai said the central bank may temporarily accelerate purchases of JGBs to contain rises in bond yields, but won’t have to buy huge amounts to cap yields around its zero percent target.
Marcel Thieliant, senior Japan economist at Capital Economics in Singapore, said: “We expect U.S. 10-year yields to climb further to 3.0 percent by year-end so chances are that the BOJ will have to conduct additional fixed purchase operations in coming months.”