BoJ steps in again after 10-year bond yield hits 18-month high

Japan’s second intervention in a week comes ahead of central bank meeting

Emma Dunkley and Hudson Lockett in Hong Kong and Leo Lewis in Tokyo

There is speculation that the Bank of Japan will announce changes to the balance of its ¥6tn-a-year exchange-traded fund buying programme © Bloomberg

Japan’s central bank has made its second intervention in a week to support the domestic bond market after the yield on 10-year government debt hit its highest in 18 months.

The Bank of Japan on Friday launched a special bond-buying operation to suppress yield, which moves inversely to price, back below 0.1 per cent. Investors had sold out amid reports that the central bank might scale back its stimulus programme next week.

In a rare move, the BoJ offered to buy unlimited amounts of the 10-year notes at a yield of 0.1 per cent, 1 basis point lower than its operation on Monday at 0.11 per cent. The yield on the ten-year note closed a basis point higher at 0.09 per cent.

Analysts said Friday’s move by the BoJ was in part driven by mounting speculation over next week’s meeting and the various theories in the market about what — if anything — it planned to announce.

The central bank used Friday’s operation — and the surprise setting of the purchase rate 1 basis point lower than its operation on Monday — to show the market that it can change its fixed rate operation at any time, said Shuichi Osaki, Bank of America Merrill Lynch’s Japan rates strategist.

There is additional speculation that the BoJ will announce changes to the balance of its ¥6tn ($54bn) exchange-traded fund buying programme.

That scheme is based on a basket of stocks — including Uniqlo owner Fast Retailing — which is more heavily weighted in the Nikkei 225 average that has seen huge swings in recent sessions relative to the less volatile Topix index.

Nicholas Smith, Japan strategist at CLSA, noted the potential for more volatility if the BoJ did make changes to further favour ETFs, based on the Topix. “Do not underestimate the impact from changing ETF weights,” he said.

Japan’s central bank faces pressure to rein in its ultra-loose monetary policy, which has failed to boost inflation to its targeted level, while weighing heavily on bank profits. The yield curve control policy was introduced in late 2016 in part as a measure to offset some of the pain of the negative interest rate policy it introduced earlier that year.

Analysts who expect the BoJ to move sooner rather than later said it would do so because the policy is losing its effectiveness in terms of protecting the banks.“

The BoJ views the steepness of the curve as an important factor in determining bank profitability,” said Joachim Fels, global economic adviser at Pimco, the US-based bond fund manager. “That is why we think at some stage, maybe already at the next meeting . . . we may see a step towards allowing somewhat higher 10-year yields.”

He added that 10-year US Treasuries were more attractive, as the yield is much higher and the price has “room to rally” if “something goes wrong” in the global economy.

“Our view is that yields can go back to 3 per cent in the US . . . I wouldn’t even rule out that we move to 3.25 per cent, but we would typically see this as a good buying opportunity if and when this happens,” Mr Fels added.

Takahiro Sekido, an analyst at MUFG, said recent media reports on the BoJ have caused Japan’s currency to strengthen. The yen was fractionally stronger on Friday, rising 0.3 per cent to ¥110.95 per dollar.

Mr Sekido said that Haruhiko Kuroda, BoJ governor, was “unlikely to outline his view of monetary policy entirely” at the meeting next week.

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