REPEAT:MNI INSIGHT: BOJ To Allow Slight Yield Curve Steepening

--BOJ Sees Higher Super-Long Bond Yields To Have Favorable Effects

--BOJ May Consider Dropping Release of JGB Buying Operation Dates

By Hiroshi Inoue

     TOKYO (MNI) - At its July 30-31 policy meeting, the Bank of Japan 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.

     The BOJ does not publish its internal market operation target but it is

believed to be allowing the 10-year JGB yield to move between -0.1% and +0.1%.

     If the 10-year yield is about to rise sharply along with wider fluctuations

in super-long bonds, the bank will use its usual tool -- offering to buy an

unlimited amount of 10-year JGBs at a fixed rate.

     It is uncertain whether it will continue to draw a line in the sand,

defending the 0.1% mark for the zone, when the super-long bond yield rises

gradually in step with expectations for firmer economic growth and higher

inflation toward the bank's 2% target.

     But at this point, when the annual inflation rate measured by the core CPI

(excluding fresh food) is below 1%, the BOJ is likely to demonstrate its will to

keep interest rates low.

     --TO INCREASE VOLATILITY

     In order to increase the flexibility of the flat yield curve, the BOJ may

consider dropping the monthly release of the dates on which it plans to conduct

the purchases of Japanese government bonds.

     By doing so, the bond market may regain some volatility, BOJ officials

believe.

     The BOJ is likely to say that from now on, it will conduct its bond buying

operations "flexibly," taking interest rates and the functioning of the markets

into consideration.

     Some BOJ board members are concerned over the adverse impact of continued

zero to negative interest rates on profit margins for lenders and investment

returns for pension funds and life insurers.

     --FAVORABLE EFFECTS

     BOJ board members have been saying it will take time before the bank can

achieve its 2% inflation target, and that they must watch both the costs and

benefits of large-scale stimulus.

     BOJ officials believe higher yields on super long-term bonds will not have

a serious negative impact on economic activity, and that they should help banks,

life insurers and pension funds.

     JGB yields have stayed at low levels and the volatility in the bond market

has fallen significantly in light of the BOJ's massive purchases of JGBs.

     BOJ officials think they must keep short-term interest rates at low levels

to achieve the 2% inflation target, but they also think that it is appropriate

for the yields on super long-term bonds to move flexibly based on market views

on growth and inflation.

     The BOJ has said short-term interest rates are the most important ones for

the economy and commercial lending rates.

--MNI Tokyo Bureau; tel: +81 90-4670-5309; email: max.sato@marketnews.com