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MNI INSIGHT: BOJ Ready To Curb JGB yield Rise, Watching US

By Hiroshi Inoue 
     TOKYO (MNI) - Bank of Japan officials are closely watching the risk of a
sudden rise in bond yields in light of a slight steepening of the largely flat
U.S. Treasury yield curve, but it is uncertain whether the BOJ will raise the
scale of its JGB purchases on Friday, MNI understands.
     The U.S. Treasury 10-year yield rose to 2.626% on Thursday, hitting the
highest level since March 14, 2017.
     However, BOJ officials don't think the U.S. Treasury 10-year yield will
rise to a long-term equilibrium rate of 2.75% anytime soon because wages and
inflation are still tame
     They also believe any sharp rise in JGB yields would be temporarily and
limited unless the U.S. 10-year yield rises above the key level.
     Under the yield curve control framework, the BOJ is seeking to stabilize
the 10-year government bond yield, the benchmark for long-term borrowing costs,
at around zero percent and keep the overnight interest rate at -0.1%.
     The 10-year JGB yield traded at 0.080% early on Friday, up 0.5 basis points
from Thursday's close. It rose to 0.090% on Thursday for the highest level since
July 12, 2017.
     --JGB PURCHASE SCALE
     On Friday, the BOJ plans to conduct its outright JGB buying operations with
remaining life of 5 to 10 years, 10 to 25 years and more than 25 years.
     The focus is on whether the BOJ will increase the scale of its purchases of
5 to 10 years bonds, raising it from Y410 billion on Monday.
     On July 7, 2017, when the 10-year JGB yield rose close to 0.110%, the BOJ
increased the scale of its bond purchases with a remaining life of 5 to 10 years
to Y500 billion from Y450 billion, in order to curb a further rise in the
10-year yield.
     At the time, the BOJ also said it would buy an unlimited amount of 10-year
bonds at a fixed-rate of 0.110% but there was no seller.
     --UNDESIRABLE YIELD LEVEL
     The move indicated that the BOJ considered the 10-year bond yield above
0.110% "undesirable," judging from the yield curve control policy framework.
     The BOJ stands ready to tackle an undesirable surge in JGB yields with an
increase of its outright bond buying or a fixed-rate bond buying operations
because the central bank believes the current yield curve based on 10-year bond
rate around zero percent is necessary to keep the momentum toward achieving its
2% inflation target.
     BOJ officials also don't expect JGB yields to rise sharply because the
domestic inflation is still far from the 2% price target but they are watching
for a rise in U.S. inflation expectations, which could accelerate a rise in U.S.
Treasury yields.
--MNI Tokyo Bureau; tel: +81 90-2175-0040; email: hiroshi.inoue@marketnews.com
--MNI Tokyo Bureau; tel: +81 90-4670-5309; email: max.sato@marketnews.com
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