MNI INSIGHT: BOJ Sees Higher 10-Yr JGB Yields Unlikely For Now

By Hiroshi Inoue

     TOKYO (MNI) - The Bank of Japan doesn't expect the yield on the benchmark

10-year JGB yield to extend gains far above 0%, despite higher bond yields

around the world in recent weeks, unless bond market investor perceptions of a

sluggish Japanese economy and a weak inflation outlook improves significantly,

MNI understands.

     Officials at the BOJ see the recent rise in JGB yields as linked to higher

U.S. Treasury yields, but any further upside is being capped by strong investor

demand at these levels.

     The 10-year JGB yield rose to 0% on Dec 10 for the first time since early

March as U.S. bonds sold off, but investor demand and BOJ buying to stabilize

the yield "around zero percent" have acted as a ceiling for now. However, the

BOJ is accepting of some leeway in higher yields, prepared to see them "move

upward and downward to some extent" in line with the changes in growth and

inflation.

     --YIELD RANGE

     In July 2018, the bank "strengthened" its yield-curve control framework, a

key pillar of monetary policy, allowing a wider trading range of +0.2% to -0.2%

for the 10-year Japanese government bond yield, double the previous, unofficial

range of +0.1% to -0.1%.

     The 10-year bond yield fell to -0.295% on Sep 4, outside the BOJ comfort

zone, but the central bank took no action as the move was deemed to be

appropriate to moves in global bond markets. Later that month, the BOJ did act,

reducing the size of its long-term bond buying operations.

     The are certain board members who feel the BOJ should step in automatically

to buy JGBs if the yield rose to 0.19%, therefore maintaining the integrity of

the unofficial range. Other Bank officials are dismissive of any fixed-rate

operations, believing it would indicate a level the BOJ tolerated and giving the

market a target to aim at.

     The BOJ's last fixed rate bond buying operation was implemented on July 30,

2018, when it offered to buy 10-year bonds at 0.100% to cap further upside. In

the first instance, the Bank would likely address the issue with an increase in

the current size of the purchase operations in the 5-10-year bucket.

--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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