BOJ Offers Four Days of Unlimited Bond Buying to Defend Yield Cap

A man wearing a protective mask walks past the Bank of Japan headquarters amid the coronavirus disease (COVID-19) outbreak in Tokyo, Japan, May 22, 2020. REUTERS/Kim Kyung-Hoon

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  • BOJ announces plan to intervene for second time this year
  • BOJ offers to buy unlimited 10-year JGBs at 0.25% in the morning
  • BOJ Makes Second Afternoon Offering After Yields Continue To Rise
  • Widely anticipated move as performance approached implied limit
  • Dollar/Yen Hits 6-Year High on Widening Interest Rate Gap

TOKYO, March 28 (Reuters) – Struggling to swim against the tide of rising interest rates globally, the Bank of Japan staunchly defended its 0.25% yield cap on Monday by offering to buy an unlimited amount of government bonds during the first four days of this year. week.

The BOJ’s defense of its ultra-loose policy pushed the yen to a six-year low of 124 per dollar on Monday, adding to the troubles facing Japan’s economy due to rising costs of fuel and raw material imports. .

Under pressure from steadily rising yields, the BOJ launched its defense by making two offers in a single day to buy 10-year Japanese Government Bonds (JGBs) in unlimited amounts at 0.25%.

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The central bank then said it would make the same unlimited offer for the next three days, to make sure investors got the message loud and clear, but some economists believed the central bank’s control of the yield curve was at risk. to fade away

“The power of the BOJ’s unlimited bond-buying supply is clearly waning,” said Takahide Kiuchi, a former central bank board member who is now an economist at the Nomura Research Institute.

“Markets may further test the BOJ’s resolve to defend the 0.25% ceiling, which may prompt the bank to alter its approach and allow the 10-year yield to go higher.”

The BOJ’s first offer for unlimited bond purchases in the morning failed to prevent the 10-year JGB yield from hitting a six-year high of 0.250% on Monday, the level the bank has set as an implied limit around its performance target.

The central bank made a second offer in the afternoon to buy unlimited amounts of JGB with maturities of more than five years and up to 10 years.

While the first offer did not attract bids, the BOJ accepted offers to buy 64.5 billion yen ($524 million) worth of JGB in the second offer.

The two offers, which were the first since Feb. 10, underscored the BOJ’s determination to keep rates very low in contrast to the Fed’s aggressive rate-hike plans.

The BOJ then announced a plan to buy unlimited amounts of 10-year JGB at 0.25% for three consecutive days starting Tuesday, deploying the most powerful weapon in its arsenal to defend its yield target.

“Markets are testing the BOJ, so the central bank has no choice but to continue offering unlimited bond purchases,” said Takafumi Yamawaki, head of Japan fixed income research at JPMorgan Securities.

“If yields are allowed to exceed 0.25%, investors will think the BOJ has tolerated a rise above that level. That makes it difficult for the BOJ to continue to control the yield curve.”

Under Yield Curve Control (YCC), the BOJ is committed to guiding the 10-year JGB yield around 0% as part of efforts to stimulate the economy by keeping borrowing costs low.

The BOJ’s current guidance is that it will allow the 10-year yield to move flexibly around its 0% target as long as it remains below the 0.25% upper bound, though it will take into account not only the level but also the the speed of any increase. in returns.

BOJ Governor Haruhiko Kuroda has repeatedly said the central bank would keep interest rates at current ultra-low levels, given the fragile economic recovery and inflation remaining well below its 2% target.

Growing complaints from politicians about a weak yen, which is inflating Japan’s already rising import costs, may complicate the BOJ’s efforts to keep yields very low, analysts say.

The dollar is up more than 7% against the yen so far in March, its biggest monthly gain in more than five years.

The BOJ is caught in a dilemma. By capping rates at zero, he is fueling yen declines that can hurt the economy by raising costs for households and businesses.

“Biding unlimited bond purchases too often may cast doubt on the feasibility of yield curve control,” said Shotaro Kugo, an economist at the Daiwa Research Institute.

“It may also draw unwanted public attention to yen weakness, so the BOJ probably wants to avoid intervening too often.”

($1 = 123.1200 yen)

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Information from Leika Kihara; Additional reporting by Kantaro Komiya, Daniel Leussink, and Takahiko Wada; Edited by Shri Navaratnam, Stephen Coates and Simon Cameron-Moore

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