MNI INSIGHT: BOJ Not Planning Higher Rates, Happy L/T Ylds Up

By Hiroshi Inoue

     TOKYO (MNI) - The Bank of Japan has no plans to intentionally push interest

rates higher, although it hopes rates all along the yield curve move flexibly to

reflect the economy, price conditions and U.S. Treasury yields, MNI understands.

     BOJ officials believe fluctuating Japanese government bond yields will

contribute to increased functioning, liquidity and trading in bond markets, the

aim of the BOJ policy decisions announced in the Summer.

     In July, the BOJ paved the way for JGB yields to move more flexibly in a

wider trading band, by allowing the 10-year bond yield to move a range of -0.2%

to +0.2%, doubling from the previous unofficial range of -0.1% to +0.1%.

     The BOJ has seen conditions tighten at the longer-end of the JGB curve on

strong demand from investors, triggering the bank to decide on Sept 21 to scale

back their own buying in the 25-year-plus bucket to Y50 billion from Y60 billion

at the previous similar operation.

     --BOJ ALSO FLEXIBLE

     Central bank officials don't think paring back on longer-end bond buying

will impede its target of keeping the 10-year JGB yield around 0%.

     If market conditions warrant, the BOJ would consider reducing the scale of

its buying of JGBs across the board. BOJ officials think it unnecessary for the

Bank to buy bonds if the 10-year JGB yield, as the long-term interest rate

target, holds the -0.2% to +0.2% range.

     The BOJ has no intention to give financial markets the impression that it

is pushing up JGB yields, but hopes market players become accustomed to

fluctuations in bond yields.

     The recent pick up in JGB yields are, MNI believes, to acceptable levels

for the BOJ. However, the Bank stands ready to address a rapid rise in yields

through prompt and appropriate JGB purchases.

     On Tuesday, the 20-year JGB yield rose to 0.655%, the highest level since

March 2017. The 30-bond yield rose to 0.910%, the highest since July 2017, while

the 40-year yield rose to 1.070%, the highest level since October 2017. 

     --MORE FLUCTUATIONS EYED

     The BOJ willingness to act was reflected by remarks from BOJ Governor

Haruhiko Kuroda in Osaka on Tuesday.

     "Fluctuations in the 10-year bond yield have been limited to a tight range,

which means the functioning of the bond markets is declining. We wouldn't mind

seeing a wider movement of the 10-year yield," Kuroda said.

     "It is appropriate for the 10-year bond yield to move widely. In order to

keep the sustainability of monetary policy, the BOJ will continue carefully

watching the side-effects of easy policy and will respond appropriately," he

said without elaborating.

--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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