MNI INSIGHT: BOJ Vigilant Against USTs Pushing JGB Ylds Higher

By Hiroshi Inoue

     TOKYO (MNI) - Japan's domestic economic fundamentals will not sharply

increase upward pressure on Japanese government bond yields as the improvement

of inflation rates will not accelerate sharply, the BOJ views.

     However, MNI understands BOJ officials remain vigilant against developments

of U.S. Treasury yields, which will increase upward pressure on JGB yields, with

the central bank standing ready to curb undesirable higher bond yields.

     At the July 30-31 policy meet, the BOJ board decided by a 7-to-2 vote to

make both its long-term interest rate target and asset purchases more

"flexible," allowing the nearly flat Japanese government bond yield to steepen

slightly in line with firmer growth and inflation.

     A policy statement issued after the meeting didn't refer to a 10-year yield

range that the will BOJ tolerate, but Governor Haruhiko Kuroda told a news

conference that the bank will allow a wider range of +0.2% to -0.2% for the

10-year JGB yield, double the previous unofficial range of +0.1% to -0.1%.

     On Aug 2, when the 10-year bond yield rose to 0.145%, the highest level in

18 months, the BOJ tried to curb a further rise through an extraordinary bond

buying operation, as the pace of bond yield rises was seen as too rapid.

     --IMPORTANT KURODA'S REMARKS

     BOJ officials in charge of daily operations take Kuroda's remarks on a

range of +0.2% to -0.2% seriously, and stand ready to fight higher 10-year bond

yields through an increase in the scale of its bond buying or/and a fixed-rate

bond buying operation.

     However, they think that the BOJ will not face an imminent challenge to

conduct a fixed-rate bond buying operation, as bond players remain cautious

about chasing JGB yields higher.

     --WEAK DOMESTIC FACTORS

     Japan's core consumer price index (excluding fresh food) rose 0.8% on year

in June for the 18th straight year-on-year rise. The pace picked up from +0.7%

in May but it is far from the bank's 2% price target.

     Inflation rates remain slow to respond to a sustainable economic recovery

and tight labor market conditions.

     BOJ officials don't expect a sharp pick-up in upward pressure on JGB yields

due to domestic factors, judging from a continued weak price moves.

     Unless upward pressure on U.S. Treasury yields increases sharply, the

10-year JGB yield will not move toward +0.2%, BOJ officials view.

     --PACE, BACKGROUND EYED

     Unless the 10-year JGB yield rise sharply, the BOJ will not need to conduct

a fixed-rate bond buying operation, instead, the BOJ will cope with a gradual

rise in bond yields by increasing the scale of its purchase of JGBs with a

remaining life of between 5 and 10 years, the BOJ views.

     As for bond yield rises, BOJ officials are focused on pace and driving

factors. If the 10-year bond yield rose gradually due to improving inflation

rates or the economy, it will make it difficult for BOJ officials to deal with

higher yields.

     If the rise in the 10-year bond yield was rapid, showing signs of rising to

0.2% and beyond, the BOJ would conduct a fixed-rate bond buying operation below

0.2%.

     The BOJ will not guide bond yields higher but it will accept a gradual rise

in bond yields based on improving economic fundamentals.

--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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