Bank of Japan Boosts Bond Purchases as Yields Hit Decade Peak

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The Bank of Japan’s recent move to increase its bond purchases at the latest auction has been prompted by a surge in government bond yields, challenging its commitment to maintaining its yield curve control policy.

According to the statement released by the Japanese central bank on Monday, it will be conducting unspecified additional purchases of Japanese government bonds with tenures exceeding five years and up to 10 years. This decision comes on the heels of the BOJ’s reported 300 billion yen bond purchase last Friday, with similar maturities.

With 10-year Japanese government bond yields reaching as high as 0.775% on Monday, the highest since September 2013, and nearing the BOJ’s strict 1% cap, the Japanese yen experienced a dip of nearly 0.3% against the dollar, approaching the 150 yen mark, which triggered BOJ intervention in the previous year.

The hawkish sentiment expressed in the minutes of a robust BOJ September policy meeting, released earlier on Monday, has revived expectations that the central bank might be gradually preparing to phase out negative interest rates. The policy shift in July, allowing longer-term rates to move more in line with rising inflation, was interpreted as the beginning of a gradual departure from the yield curve control policy set by Governor Kazuo Ueda’s predecessor.

The yield curve control, known as YCC, is a crucial policy tool utilized by the BOJ to target an interest rate, buying and selling bonds as necessary to achieve the set goal. It is part of the bank’s comprehensive ultra-loose monetary policy, which involves maintaining short-term interest rates at -0.1% as part of its long-term effort to combat deflation in the Japanese economy.

On the other hand, concerns about repatriation risks have surfaced, especially following comments made by an unnamed policymaker during the September BOJ meeting, suggesting that sustainable achievement of the 2% inflation target might be within reach. Despite this, the BOJ has decided to uphold its accommodative policy stance and keep rates unchanged, citing the highly uncertain growth outlook both domestically and globally.

While core inflation has consistently surpassed the central bank’s 2% target for 17 months, the BOJ remains cautious about prematurely unwinding its aggressive stimulus measures. The bank’s cautious approach is driven by the belief that sustainable inflation relies on substantial wage growth, which would subsequently support household consumption and overall economic expansion.

However, the Bank of Japan might be compelled to consider rate hikes earlier than expected if the Japanese yen weakens beyond the 150 mark against the dollar, potentially leading to the unwinding of the yen carry trade and prompting the return of Japanese capital to domestic bond markets. This scenario, as highlighted by Bob Michele, global head of fixed income at JPMorgan Asset Management, could potentially trigger market volatility, necessitating careful monitoring by the central bank.