Why MNI
MNI is the leading provider
of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.
The Bank of Japan will likely tolerate the 10-year yield falling to around -0.30% under its new policy framework, but will be concerned if that triggers a sharp drop in longer-end bond yields, which could be economically damaging and tough to counter, MNI understands.
The bank basically leaves rate developments to markets and has said it will not "strictly respond" to a drop in the 10-year yield below the lower end of the range around -0.25% to +0.25% in day-to-day movements.
The risk is that such a decline could trigger arbitrage trading, increasing downward pressure on longer-end yields, which could undermine sentiment and have a negative impact on economic activity.
BOJ officials assume JGB yields are not set for a rapid decline now, as U.S. Treasury bond yields will remain at relatively high levels due to recovery hopes and the expected increase in bond issuance.
In Japan, the only time yields broke out of a then perceived +/-20 bps trading band was in August 2018, when the benchmark 10-year yield fell to a near-record low of -0.28%, just weeks after Governor Haruhiko Kuroda suggested the central bank would tolerate yields in a band of 20bps either side of the 0% target rate. Kuroda first suggested a range in Sept 2016, effectively introducing Yield Curve Control, laying out the initial +/-10 bps range as a reaction to yields falling as low as -0.29%.
Source: Bloomberg
CURB HIGHER YIELDS
While the bank can easily curb higher JGB yields with powerful tools such as consecutive day fixed-rate purchase operations and bond-buying operations, there are few easy ways to prevent longer-end bond yields from falling.
It is also constrained from conducting operations to push up 10-year bond yields due to its latest policy decisions, such as the tolerance for lower yields.
It is unlikely the BOJ will resort to an outright sale of JGBs, as there would be grave concerns over both the policy measures it would send and the ability of markets to absorb the supply.
Sales of JGBs via repurchase agreements may be possible but the impact would be short-lived.
At the margins, the bank can gain some leeway by managing its bond buying operations. It can either reduce the scale of its bond purchases on a scheduled day to support longer end yields or even move up its scheduled operation and reduce the scale.
Why MNI
MNI is the leading provider
of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.