TOKYO: The Bank of Japan desperately defended its yield target on Monday by making two offers in a single day to buy an unlimited amount of government bonds, as rising long term interest rates posed the biggest challenge yet to its ultra loose policy.
The yield on the benchmark 10-year Japanese government bond (JGB) hit a fresh six-year high of 0.250% on Monday, even after the central bank stepped into the market with an offer to buy unlimited amount of JGBs to defend the implicit 0.25% ceiling set around its yield target.
After the morning offer failed to push down yields, the BOJ made a second offer in the afternoon to buy unlimited amounts of JGBs with maturities of more than five years and up to 10 years.
The two offers, which were the first since Feb. 10, underscored the BOJ’s resolve to keep rates ultra-low, even as other central banks such as the US Federal Reserve move toward rate hikes.
Prospects of widening U.S-Japan interest rate differentials pushed the dollar to a more than six-year high of 123.04 yen on Monday.
“This operation is a message from the BOJ that it will maintain ultra-easy policy for the time being,” Masahiro Ichikawa, chief market strategist at Sumitomo Mitsui DS Asset Management, said after the BOJ’s offer in the morning.
The 10-year JGB yield has been creeping up in tandem with a rise in US long-term interest rates, as investors have priced in the prospect of aggressive rate hikes by the Federal Reserve.
Markets had been focusing on when the BOJ could step in to defend the 0.25% ceiling, after refraining to do so on Friday as the 10-year yield topped the level at which the central bank had offered to buy an unlimited amount in February.
“In light of recent moves in long-term interest rates, we made the offer to ensure we abide by the board’s guidance to have the 10-year JGB yield move around the 0% target,” a BOJ official told Reuters after making the offer in the morning.
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 stays below the 0.25% upper limit, though it will take into account not just the level but the speed of any rise in yields.
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The 10-year JGB yield has been creeping up in tandem with a rise in US long-term interest rates, as investors have priced in the prospect of aggressive rate hikes by the Federal Reserve over the course of this year.
BOJ Governor Haruhiko Kuroda has repeatedly said the central bank would maintain interest rates at the current ultra-low levels, given the fragile economic recovery and as inflation remains well below its 2% target.
While the first offer drew no bids from financial institutions on Monday, the BOJ’s announcement will effectively discourage market players from driving up the 10-year yield above 0.25%, analysts say. The market was still awaiting the results of the second offer.
But some market players doubt how long the BOJ can continue defending the ceiling, as making frequent offers for unlimited buying could weaken the yen further and inflate Japan’s already surging import costs.
“Making offers for unlimited bond buying too frequently may cast doubt over the feasibility of yield curve control,” said Shotaro Kugo, an economist at Daiwa Institute of Research.
“It may also draw unwanted public attention over the weak yen, so the BOJ probably wants to avoid stepping in too often.”
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