MNI INSIGHT: BOJ Divided On Lower 10-Yr Yields; Eyeing Options

By Hiroshi Inoue

     TOKYO (MNI) - The Bank of Japan is divided over how far it will tolerate

lower benchmark bond yields, but there is little sense of an urgent need to take

action to reverse recent market moves, although there is a concern that renewed

strength in the super-long sector will distort the yield curve, MNI understands.

     The BOJ accepts that sharply lower longer-end bond yields will squeeze

profits at commercial banks and undermine the financial system, which in turn

will worsen consumer sentiment, but is divided over both how far yields should

be allowed to fall and how to act to curb the slide if needed.

     Reducing the frequency of BOJ buying from current levels and reducing the

size purchased per operation remain options.

     The BOJ last reduced the scale of its purchases of super long-end bonds to

Y140 billion from Y160 billion in early August, lowering the size of its buys in

the 5-to-10-year sector to Y400 billion from Y450 billion later that month.

     --CLARIFICATION

     The BOJ board may re-clarify its position on yields and aims in the

September 19 policy statement, although it could be left for comment by Governor

Haruhiko Kuroda at the subsequent press conference.

     Some of the pressure is off the BOJ as yields have bounced back from recent

lows, allowing time to recalibrate its approach. On Sep 4, the 20- and 30-year

bond yields fell to 0.015% and 0.095%, respectively, for the lowest levels since

July 2016, before jumping to 0.195% and 0.340% on Sep 13.

     --KURODA COMMENTS

     Kuroda said in a recent interview that longer-end bond yields had fallen a

touch too far, a very rare utterance from a BOJ governor. Bank officials at

least in part point to his remarks as a driver for the move higher in yields,

although accepting it was part of the wider reversal in global bond markets in

recent weeks.

     Japan's 10-year bond yield fell to -0.295% on Sept 4, before reversing

course trading at -0.155% on Sept 17 -- back within the BOJ's unofficial -0.2%

to +0.2% trading range.

     Some BOJ policymakers are less fazed by lower 10-year JGB yields, believing

they should be tolerated and allowed to trade flexibly unless breaking below

-0.500%. Others see the need to clarify the board's assessment regarding the

10-year's recent drop near to -0.300%.

--MNI Tokyo Bureau; tel: +81 90-2175-0040; email: hiroshi.inoue@marketnews.com

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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