Battling market forces, BOJ conducts special operation to curb rising yields

© Reuters. FILE PHOTO: Exterior of Bank of Japan’s headquarter is pictured in Tokyo, Japan, June 17, 2022. REUTERS/Kim Kyung-Hoon

By Kevin Buckland

TOKYO (Reuters) – The Bank of Japan said it would purchase Japanese government bonds in a special operation on Tuesday, with the benchmark 10-year yield brushing against the 0.25% policy ceiling as the central bank battles a relentless upward surge in global rates.

The BOJ stands alone among developed markets in keeping the short-term policy rate negative, in addition to pinning the zero long-term yield, citing tepid wage growth, relatively low core consumer inflation compared with peers, and a fragile economic recovery.

The BOJ will purchase debt with 10- to 25-year maturities worth 100 billion yen ($692.28 million), and securities with 5- to 10-year maturities worth 150 billion yen.

The benchmark 10-year JGB yield was up 0.5 basis point at 0.25%, as of 0538 GMT, a level not seen since Sept. 16. The central bank pins the yield at +/- 25 basis points around zero under its yield curve control policy.

Japan’s bond market is under pressure amid a broad climb in global yields as major central banks including the U.S. Federal Reserve and the European Central Bank race to hike interest rates to rein in superheated inflation.

“The BOJ is trying to calm down speculation that it could be forced to change policy,” said Masayuki Kichikawa, chief macro strategist at Sumitomo Mitsui (NYSE:) Asset Management in Tokyo.

“It makes very clear that it has no intention to change monetary policy for the foreseeable future.”

STRAINED MARKETS

Japan’s central bank maintained its stance last week, despite growing policy divergence pushing the yen to 24-year lows. Japanese authorities intervened in the foreign exchange market for the first time since 1998 to shore up the battered currency.

The upward trajectory in rates has been exacerbated in recent days by soaring UK gilt yields after investors delivered a scathing assessment of the new government’s fiscal plans.

In a sign of the strain on the market, 10-year notes with nine years to maturity were at 0.3%, according to Tradeweb Markets (NASDAQ:).

Benchmark 10-year JGB futures fell 0.29 point to 147.71 after earlier touching a three-month low of 147.62.

“The BOJ controls the 10-year yield but other maturities are not controlled so we’re seeing a skew, a kind of bizarre shape of the yield curve,” Sumitomo Mitsui’s Kichikawa said.

Traders said the market had also been on edge ahead of an auction of 40-year JGBs, after a very poor result for a 20-year bond sale on Sept. 15. However, the latest sale went smoothly, market players said.

Even so, the 40-year JGB yield jumped 8.5 basis points to 1.635%, the highest level in Refinitiv data going back to 2015.

The yield on the 30-year JGB rose 6 bps to 1.435% for the first time since September 2015, and the 20-year yield advanced 4 bps to 1.03% for the first time since December 2015.

The five-year yield added 2 bps to 0.09%, a level not seen since September 2015.

The two-year yield rose 1 bp to a three-month high of -0.050%.

($1 = 144.4500 yen)