BOJ yield spread control and operations… While global markets naturally await the Fed's decision with curiosity, we see that the control mechanism that a central bank from a different perspective tries to apply on the bond market has been struggling recently. The Bank of Japan (BOJ) announced that it is expanding its planned bond purchases to include longer-term bonds due to rising global bond yields. The BOJ increased its 5-10-year bond purchases to 800 billion yen from the 500 billion yen announced earlier, after Japan's 10-year bond yield soared above 0.25%, the top of the tolerance band.
The previously undisclosed acquisition operation for long-term bond purchases came after Japanese 30-year bond yields soared to 1.26%, their highest level since 2016. "The BOJ will make changes, as necessary, to the bidding program and the exact purchase quantities of JGBs, taking into account market conditions," the statement said.
Japan 10-year bond yield and JPY comparison… Source: Bloomberg
Rising JGB yields… Yields soared as the Fed fueled fears of an even more aggressive rate hike in the coming months, after recent data showed US consumer prices rose in May. The yen fell to a 24-year low against the dollar as the gap between Japanese and US benchmark bond yields widened after US inflation data boosted Treasury yields. Japan's 10-year yields rose despite the central bank's offers to buy unlimited amounts of 10-year bonds to keep the benchmark rate below the bank's target. The 20-year JGB yield rose to 0.850% and the 30-year JGB yield to 1.160%, steeping the yield curve.
Fixed rate perspective… Under yield curve control, BOJ drives short-term rates at -0.1% and 10-year JGB yields around 0%. The BOJ has been buying an unlimited amount of 10 years of government every day since April. If we recall, in the details of the BOJ decisions in April, the items regarding return control were as follows;
Short-term policy interest rate: The Bank will apply a negative interest rate of minus 0.1% to the Policy Interest Balances in current accounts held by financial institutions with the Bank.
Long-term interest rate: The bank will purchase the required amount of Japanese government bonds (JGB) without setting an upper limit to keep 10-year JGB yields around 0%.
Explanation on how the Bank carries out flat rate purchases for consecutive days: For the application of the above guide in market transactions, the Bank may purchase 10-year JGB at 0.25% each business day through flat rate purchases, unless it is highly unlikely that no bid will be made. will buy them.
Conclusion? The dilemma for the BOJ is that it is not in a position to give up on policy while the inflation target is still far away, but it helps fuel yen weakness while maintaining its yield target, which increases households' cost of living. The BOJ's view is that allowing 10-year JGB yields to rise above the upper tolerance level will cost the economy more than the depreciation of the yen. The BOJ will either leave the ceiling or pull it from 0.25% to 0.50%, or continue to push from the new cliff with yield control.
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