MNI STATE OF PLAY: BOJ To Allow Wider Longer-End JGB Trading

By Hiroshi Inoue

     TOKYO (MNI) - Under the "flexible" yield curve control framework, the Bank

of Japan will allow the yields on super long-term Japanese government bonds with

20-, 30- and 40-year maturities to fluctuate more widely than the new +0.2% to

-0.2% range for the 10-year yield, MNI understands.

     That will lead the flat yield curve to steepen while the BOJ is still

struggling to guide low inflation to its 2% target, but BOJ officials are

confident that they can control the 10-year bond yield at "around zero percent,"

or in a flexible range of +0.2% to -0.2%.

     After the latest two-day policy meeting, BOJ 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 current unofficial range of +0.1% to -0.1%.

     This should help recover the function of the tepid JGB market, one of the

side-effects of large-scale monetary easing, and make the reflationary policy

based on massive asset purchases more sustainable, he said.

     --NOT RIGID RANGE

     The new trading range for the 10-year bond yield "is not rigid," meaning

the BOJ may allow the yield to temporary rise above 0.2%, a person who is

familiar with BOJ thinking said.

     The person added that it is "natural" that the trading range for longer-end

bond yields will be wider than that for the 10-year yield, and that "would not

be troublesome" for the economy.

     If higher longer-end JGB yields exerted upward pressure on the 10-year

yield, sending it far above 0.2%, the BOJ's market operation team would put a

lid on the move by increasing JGB purchases and/or conducting a fixed-rate

buying operation.

     If the BOJ tries to limit the upside of the range, it is expected to

announce to buy an unlimited JGBs with a remaining life of 5 to 10 years at a

fixed rate of 0.20%, or slightly higher, depending on how fast the yield is

rising.

     As long as the fluctuations in longer-end bond yields don't impede stable

trading in the 10-year yield within the trading range, the BOJ will tolerate

those yields to move, reflecting market views on the economy and inflation,

another person who is familiar with BOJ thinking said.

     The BOJ board decided Tuesday in a 7-to-2 vote to make 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.

     This will also help recover some functions of the tepid JGB market while

keeping the stimulative effects of large-scale monetary easing.

     "Trading in the JGB market has shrunk and its function has been reduced. By

allowing a wider trading range, I think the market will regain some vitality,"

Kuroda said on Tuesday.

     The 10-year bonds traded at 0.075% on Wednesday, up three basis points from

Tuesday's close. The yields on the 20- and 30-year bonds were 0.540% and 0.760%,

both up a full basis point. The 40-year bonds traded at 0.875%, up one and a

half basis points.

     --MAY CUT BUYING

     The BOJ is expected to gradually reduce the scale of its purchases of

longer-end bonds, although it is highly unlikely that the BOJ will do so when

the 10-year yield stays below 0.100% because that would be considered a sign of

the BOJ guiding interest rates higher.

     BOJ officials wish to reduce the pace of asset purchases when financial

markets are stable. As a result of prolonged large-scale easing, the central

bank already holds about 40% of the JGBs in the market.

--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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