A day of market gyrations and pressure for higher interest rates has forced the Bank of Japan to tip its hand by intervening to keep 10-year yields below 0.11 per cent.
It is the first time the BoJ has turned last September’s “around zero per cent” cap on the 10-year yield into explicit action, with the central bank offering to buy an unlimited number of government bonds at more than the prevailing market price.
The BoJ action is likely to halt an upward drift in the Japanese yield curve, since traders now know the level where the central bank will move in and crush them. That, in turn, may weaken the yen.
“The move was good for two reasons,” said Naka Matsuzawa, chief JGB strategist at Nomura in Tokyo. “First, because it sent a strong message from the Bank of Japan that they still care about the 10-year range.
“And second, because they did actually buy JGBs, they sucked up some of the market pressure which means the move is more likely to be effective for longer.”
Japan’s yield curve has crept up steadily since last September as the economic environment improved and the yen weakened following the election of Donald Trump in the US.
Ten-year yields were minus 0.1 per cent in the immediate aftermath of the move to cap them, but had moved up to positive 0.1 per cent in recent days. The BoJ initially welcomed a steepening of the yield curve, but recent selling of JGBs has led to market speculation it could be forced to abandon the 10-year cap.
“I think this only buys time, rather than fixing at this level. The selling pressure is in the super-long zone, and that weaker performance is leaking into the 10-year zone,” said Mr Matsuzawa. “The BoJ judged that the super long part of the curve flattened too much last year and I don’t think that the normalisation process is over.”
The BoJ made its move after a day of drama. Ten-year yields spiked to 0.153 per cent early in the morning on Friday after the central bank disappointed the market by offering to buy just ¥450bn ($3.99bn) of five-to-10-year bonds as part of its regular asset purchase programme.
That spike prompted the central bank to come back in the afternoon session, offering to buy an unlimited amount of bonds at a fixed yield of 0.11 per cent. Traders sold ¥724bn of bonds into the offer.
The yen traded down 0.2 per cent at ¥113.06 against the dollar. It had risen as much as 0.3 per cent in the turmoil before the fixed-rate auction.
Although the unlimited purchases at 0.11 per cent seem to show the BoJ’s definition of “around zero per cent”, an official at the central bank insisted that level is not a hard cap on the 10-year yield. The BoJ may intervene at higher or lower levels in the future, the official said.