March 29, 2022
By Leika Kihara
TOKYO (Reuters) -The Bank of Japan on Tuesday kept up its relentless quest to defend a key yield cap by offering to buy unlimited amounts of 10-year government bonds, putting even more downward pressure on the yen and testing its resolve to keep policy ultra-loose.
The BOJ’s intervention raised the stakes for policymakers in the world’s third-largest economy as Japan tries to navigate the rising cost of imports from a weakening currency and global fallout of the Ukraine war.
The bond market intervention is in line with an announcement the BOJ made on Monday to offer unlimited bond buying from Tuesday to Thursday to keep the 10-year Japanese government bond (JGB) yield from rising above an implicit 0.25% cap it sets around its 0% target.
The BOJ’s first offer in the morning drew bids worth 242.6 billion yen ($1.97 billion). The central bank followed up with a second offer in the afternoon, after the early intervention failed to push down bond yields much.
Some analysts doubted if the central bank can sustain its bond-buying action for a prolonged period.
“Theoretically the BOJ can protect 25 basis-point upper bound through unlimited fixed-rate operations. But at the same time, I think this situation is not sustainable,” said Kentaro Koyama, chief economist at Deutsche Bank in Tokyo.
“In the short term, the BOJ can continue unlimited purchasing operations. But if the BOJ continues to be challenged by the market, I think it may be the trigger to adjust their yield curve control.”
Struggling to swim against the tide of rising interest rates globally, the BOJ staunchly defended its 0.25% yield cap on Monday with a rare step of offering to buy unlimited sum of 10-year JGBs at 0.25% twice in a single day.
The central bank then announced its plan for consecutive interventions that will last until Thursday.
The 10-year JGB yield stood at 0.245% on Tuesday, hovering near the BOJ’s implicit 0.25% cap despite the central bank’s intervention.
The 5-year yield rose to 0.065% on Tuesday, the highest level since September 2015.
Aside from the offer to buy unlimited amount of 10-year JGBs at 0.25%, the BOJ may also conduct unscheduled buying operation for super-long bonds if yields for the maturity spike, analysts say.
“With regard to the outright purchases of JGBs…the BOJ may change the schedule and amounts of the purchases as needed, taking account of market conditions,” the BOJ said in Monday’s statement announcing its plan for fixed-rate operations.
Under yield curve control, the BOJ pledges to guide short-term rates at -0.1% and the 10-year JGB yield around 0%.
The BOJ’s aggressive efforts to cap yields pushed the yen to six-year lows against the dollar, which could add to the strains facing households and retailers by inflating already soaring raw material import costs.
Finance Minister Shunichi Suzuki said Tokyo was carefully watching currency moves to avoid a “bad” yen fall that hurts the economy, though market reaction to the comment was muted.
The yen’s decline likely won’t discourage the BOJ from defending its yield cap, said Toru Suehiro, senior economist at Daiwa Securities.
“The BOJ’s message to prevent interest rate rises is a very strong one with no consideration to the weak-yen effect its action could cause,” said Suehiro.
Deputy Chief Cabinet Secretary Seiji Kihara, among the closest aides to Prime Minister Fumio Kishida, said on Sunday the BOJ must maintain its massive stimulus as dealing with cost-push inflation with policy tightening is difficult.
In a sign fiscal policy will play a bigger role in cushioning the blow from rising raw material costs, Kishida ordered his cabinet on Tuesday to compile a fresh relief package.
($1 = 123.4200 yen)
(Reporting by Leika Kihara; Additional reporting by Junko Fujita and Tom Westbrook; Editing by Jacqueline Wong & Shri Navaratnam)