The Bank of Japan intervened in the government bond market on Wednesday to rein in a jump in yields to fresh decade highs, underlining the challenge for the central bank a day after loosening its grip on long-term interest rates.
The 10-year Japanese government bond yield rose two basis points (bps) to 0.970%, a level last seen in May 2013, before retreating to 0.960% immediately after the BOJ announced an emergency bond-purchase operation.
The intervention comes as the BOJ continues to ease off the radical stimulus policies of its predecessor, Haruhiko Kuroda, despite weak signs that the global economy is progressing. The latest policy tweak is part of a series of incremental steps to dismantle Kuroda’s ultra-easy monetary policy. It signals that the BOJ still focuses on achieving 2 percent inflation driven by solid consumer and wage growth.
In a speech to parliament, BOJ Governor Haruhiko Ueda described the change to YCC as an “enhancement of the sustainability of monetary easing,” not a tightening of policy. But Capital Economics’ economists say that the longer the BOJ keeps inflation above target, the more likely it is to follow up this tweak with a genuine policy rate hike.
While the BoJ has taken small steps to ease its ultra-easy policy recently, market participants are skeptical that the central bank will hold off a full-scale sell-off of bonds as global rates rise and inflation pressures build. The BOJ’s intervention in the bond markets hints at its growing frustration with yields climbing too fast, especially in light of rising U.S. rates that have sent investors scurrying for safer assets.
A full-scale bond-buying spree by the BOJ would lower yields by reducing supply and increasing prices. But the BOJ has said it will only intervene when market conditions warrant it, a clear signal that it remains determined to fight rising prices and inflationary pressures.
But a more significant shift in policy stance will likely bolster the yen and deal a blow to global bond markets where Japanese investors have significant holdings. They are the biggest foreign holder of Australian sovereign debt and have invested in everything from European power stations to Brazilian credit-default swaps. A shift away from YCC could also prompt some Japanese investors to take their cash out of the global market and return it to Japan. Analysts warn that a move to tighten policy will hurt the economy unless the BoJ can convince investors that higher inflation is inevitable and sustainable. That will be a hard sell to the market if the global economic outlook worsens and consumer prices begin to head down again. A weaker yen makes it more attractive to invest abroad, so the global yield gap is widening. That has prompted some analysts to predict that the BOJ will need to intervene even more aggressively to stem the tide of rising yields.
