Japan bond yields drop as BOJ quashes policy speculation

TOKYO: Yields on Japan’s 10-year government bonds fell to their lowest in more than three weeks on Thursday after...
22 Sep, 2022

TOKYO: Yields on Japan’s 10-year government bonds fell to their lowest in more than three weeks on Thursday after the Bank of Japan affirmed its commitment to ultra-low interest rates, forcing traders to reverse bets on a policy change.

Ten-year yields fell to 0.225%, their lowest since Aug. 31, after having going untraded for two days as the BOJ aggressively defended its yield curve ceiling.

As widely expected, the BOJ kept unchanged its -0.1% target for short-term interest rates, and 0% for the 10-year government bond yield by a unanimous vote.

The yen fell after the BOJ’s announcement, which confirmed its position as the lone dove among major central banks tightening monetary policy to combat soaring inflation.

The central bank also decided to phase out a pandemic-relief loan programme and expand a liquidity operation targeting a broader range of corporate funding-needs.

“The contrast between the Fed and BOJ has become clear. The Fed will prioritise beating inflation even at the cost of cooling the economy, where as the BOJ will patiently maintain ultra-easy policy until inflation stably hits 2%,” said Naomi Muguruma, chief bond strategist at Mitsubishi UFJ Morgan Stanley Securities in Tokyo.

Japan’s 9-year bond yield rises to nearly 0.3% as BOJ meet looms

“It’s notable that the BOJ decided to extend part of its pandemic-relief funding programme until March next year,” Muguruma added. “It suggests the BOJ won’t change its forward guidance throughout the period. It also leaves the impression there will be no change in monetary policy during Kuroda’s remaining term.”

Yields on nine-year bonds maturing in September 2031, which had become the target of speculators trying to test the Bank of Japan’s resolve to pin down interest rates, fell to 0.253%, close to the BOJ’s ceiling for 10-year bonds.

That yield had hovered close to 0.3% in early trade as investors sold the most liquid bonds. “Investors were betting there could be even a small change in the yield curve, and shorted JGBs.

They have bought back,“ said Ataru Okumura, strategist at SMBC Nikko Securities Japan spent more than 2 trillion yen ($13.8 billion) in the past two days to hold a 0.25% ceiling on the 10-year Japanese government bond yield. Overnight, the Fed raised rates by 75 basis points and signaled more increases to come.

Fed Chairman Jerome Powell said US central bank officials are “strongly resolved” to bringing down inflation from the highest levels in four decades and “will keep at it until the job is done.”

Japan’s five-year yield fell 0.5 of a basis point to 0.060%, and remained unchanged even after the BOJ’s statement.

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