MNI INSIGHT (UPDATE): BOJ's Focus On JGB Yields, Yen Can Wait

(Updates with longer-tenor, extended trading time bond buying offer from BOJ)

The Bank of Japan on Wednesday showed its top priority is curbing higher Japanese Government Bond (JGB) yields with concerns over a weaker yen on the backburner as options to act are limited, MNI understands.

The BOJ’s decision reflected that addressing a weaker yen is left to the Ministry of Finance, which has the authority to handle currency issues in Japan, see: MNI MARKET ANALYSIS: USDJPY Continues To Defy Gravity.

A central bank Capital Markets Department official made it clear on Wednesday that yield curve control - a range of -0.25% to +0.25% for the 10-year bond - was the priority.

As well, few lawmakers see the need for the BOJ to unwind easy policy or to raise interest rates to curb a weaker yen, as growth concerns come to the fore.

The end of the fiscal year also brings the possibility of the BOJ issuing a rare statement on maintaining financial market stability with consumer prices expected to rise near 2% in or after April on rising cost-push energy costs, rather than the favoured demand-pull of higher wages.

MARKET DYNAMICS

BOJ officials said upward pressure on U.S. Treasury bond yields as the market ponders potential bigger-than-expected rate hikes by the Federal Reserve has been a top factor on the overall JGB yield curve, leading to a decision this week for unlimited bond buying at a fixed-rate for consecutive days from Tuesday to Thursday, which saw the tempo increase on Wednesday.

The BOJ is also worried about the risk that rising long-end bond yields will increase upward pressure on the benchmark 10-year JGB, making it difficult for the BOJ to keep the 10-year yield around zero percent.

However, the BOJ on Wednesday moved into conducting a fixed-rate bond buying operations regarding longer-end JGBs, see: MNI BRIEF: BOJ Extends JGB Buys, Longer Tenors To Check Yields.

BOJ officials are confident that while fixed-rate bond buying can be effective in curbing the 10-year JGBs, there were earlier concerns that by buying longer-dated JGBs the BOJ could give an unwanted indication of an upper yield limit.