Further JGB Yield Increases Needed To Elicit BoJ Intervention

Goldman Sachs note that “JGBs have been under pressure amidst the global sell-off in sovereign debt; 10-Year JGB yields have moved closer to top of the BoJ’s tolerance band, prompting speculation on whether the Bank will try to forestall further increases by announcing additional JGB purchase operations and/or eventually take a larger step of recalibrating its YCC program. On the former, the Bank has been comfortable in using ad hoc operations to defend the target in the past; in 2018, the Bank conducted a series of fixed-rate operations to temper the move higher in JGB yields, but only when repricing was sharp and/or yields were much closer to hitting the tolerance threshold. Past behaviour therefore suggests that we should not as yet expect the BoJ to announce fixed-rate operations. However, as other G10 yields move higher, it is quite likely that spillovers will force 10-Year JGB yields within 1-2 bps of 0.25% threshold, at which point the odds of intervention rise substantially. To be sure, the Bank could also consider more significant adjustments to its yield curve target as our economists have flagged, such as another widening in the tolerance band or a shortening in the maturity target (to 5s). However, we think this would likely only be precipitated by a material shift in underlying economic fundamentals that argue for earlier tightening.”