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MNI INSIGHT: BOJ Ready To Boost JGB Buys As Borrowing Jumps

MNI (Tokyo)
TOKYO (MNI)

Japan's central bank has the ability to respond forcefully to rapid changes in bond yields.

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The Bank of Japan stands ready to buy additional government bonds to ensure the yield curve stays at low levels, MNI understands, as the newly-elected Liberal Democratic Party-led coalition helmed by Prime Minister Fumio Kishida moves ahead with a massive stimulus package.

The government reportedly plans to issue an additional JPY22.1 trillion of JGBs in 2022, a roughly 50% increase from this year's JPY45 trillion net new issuance.

But regardless of the scale of JGB issuance, the BOJ will protect its yield curve control policy, keeping the 10-year bond between -0.25% to +0.25%.

The government on Nov. 19 approved an economic stimulus package worth a record JPY55.7 trillion on a fiscal expenditure basis and it will likely approve a supplementary budget for this fiscal year on Friday. Issuance plans for the fiscal year starting April 1 will be available in late December.

MARKET FOCUS

While the BOC can tolerate changes in JGB pricing in response to economic developments and inflation and market trends, it would not accept a sharp rise in yields. MNI has already reported that BOJ officials are worried about the risk of a bond market selloff if the Federal Reserve tightens policy sooner or more sharply than expected in response to inflationary fears. (see: MNI INSIGHT: BOJ Sees Risk Of Volatility If Fed Hikes Fast)

If necessary, the BOJ could buy a potentially unlimited amount of JGBs in the open market, but its response would depend on the speed and magnitude of market moves in yields or the exchange rate.