Japan yields tumble below policy cap after BOJ keeps status quo

TOKYO: Japanese government bond yields tumbled more than 10 basis points on Wednesday, falling back to well within the central bank’s 0.5% policy ceiling after the Bank of Japan’s unanimous decision to keep its yield curve controls in place.

The 10-year yield was last down 10.5 basis points at 0.395%, which would mark the biggest one-day decline in seven years. It was at 0.51% prior to the BOJ decision.

Anticipation had been high that Bank of Japan Governor Haruhiko Kuroda and his colleagues would change tack at Wednesday’s meeting, with expectations ranging from further tweaks to yield curve control (YCC) to a full abandonment.

Ten-year JGB futures jumped when they resumed trading following the midday break, trading up as much as 1.81 points to 146.65, the highest since Dec. 20. They had dipped to 144.15 on Friday, the lowest since March 2014.

“If they had expanded the band again or terminated YCC, yields would rise, which would be a de facto rate hike,” said Naomi Muguruma, senior market economist at Mitsubishi UFJ Morgan Stanley Securities.

“That’s not the intention of the policy board.”

BOJ defies market bets for policy tweaks, sending yen tumbling

Although it has been only a month since the BOJ shocked markets by doubling the allowable band for the 10-year JGB yield to 50 basis points either side of the 0% policy rate - ostensibly to improve market function - the change emboldened speculators to test the bank’s resolve.

The 10-year yield has repeatedly breached the BOJ’s ceiling, only to close back at the 0.5% limit on each day. On Friday, it spiked to a 7-1/2-year peak of 0.54%.

Taming yields has come at a cost, with the central bank splashing an unprecedented 10 trillion yen ($78 billion) on bond buying operations on Friday and Monday, calling into question the sustainability of the programme.

Signs that ultra-easy monetary policy may not be needed for much longer have come from consumer inflation, which in the most recent data for Tokyo was double the 2% target, and from indications that stubbornly slow-to-rise salaries may also take off after Uniqlo’s parent company said it would raise wages by up to 40%.