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Retail Sales Ahead of Expectations In August

--But This Does Not Mean Board Won't Tweak Framework Next Week
By Hiroshi Inoue
     TOKYO (MNI) - The Bank of Japan on Friday drew a line in the sand in a bond
market operation, showing a clear upper limit on the 10-year Japanese government
bond yield under the current policy framework, but this does not mean the bank
will not tweak it after its two-day board meeting ending Tuesday.
     After taking no action at its regular morning operation time at 1010 JST
(0010 GMT), the BOJ announced at 1400 JST (0500 GMT) that it was offering to buy
an unlimited amount of JGBs with a remaining life of 5 to 10 years at a
fixed-rate of 0.100%, slightly below the 0.110% rate offered in a similar
operation on Monday.
     --CURRENT UPPER LIMIT
     Friday's operation indicates the BOJ considers the 10-year bond yield at
0.1% the upper limit of its unofficial range for the policy target of keeping
the yield "around zero percent" under the current policy framework, which may be
reviewed at the July 30-31 board meeting.
     The latest operation is different from the previous five open market
operations in which the bank offered to buy an unlimited amount of JGBs at a
fixed-rate of 0.110% on Monday, July 23, Feb. 2, July 7 and Feb. 3, 2017.
     On Monday, the BOJ's market operation team had to take action as the rise
in the 10-year bond yield was rapid amid speculation that the BOJ board would
announce measures to reduce the side-effects of large-scale easing next week.
     By contrast, amid a moderate rise in the yield, Friday's operation was
aimed at showing the upper end of the 10-year bond yield that the BOJ tolerates.
     The BOJ didn't have to announce a fixed-rate operation on Friday as the
10-year bond yield was stable at 0.100%, showing no signs of rising further.
     This means the BOJ is unhappy with a 10-year bond yield above 0.100% under
the current policy framework.
     An official at the BOJ's Financial Markets Department said that the BOJ
announced the fixed-rate operation on Friday "in order to keep the 10-year bond
yield around zero percent."
     After the operation, the 10-year bond yield fell to 0.090% from 0.100%.
     Under the yield curve control framework adopted in September 2016, the BOJ
has been trying 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%.
     --TWEAKING POLICY FRAMEWORK
     At next week's meeting, the BOJ board will consider allowing the nearly
flat Japanese government bond yield to steepen slightly, recovering some
functions of the tepid JGB market while keeping the stimulative effects of
large-scale monetary easing, MNI understands.
     This means the BOJ will let the yields on super long-term JGBs with
maturities of 20-, 30- and 40-years fluctuate based on market participants'
growth and inflation outlook by gradually reducing the scale of its purchase of
those bonds.
     At the same time, the BOJ is likely to leave its official target unchanged
-- stabilizing the 10-year government bond yield, the benchmark for long-term
borrowing costs, at "around zero percent" and the overnight interest rate at
-0.1%.
     But it is uncertain whether the board will also consider tolerating a wider
"unofficial" range of fluctuations in the 10-year JGB yield.
--MNI Tokyo Bureau; tel: +81 90-4670-5309; email: max.sato@marketnews.com