The Bank of Japan (BoJ) has increased the size of its Japanese government bond (JGB) purchase operations and announced unlimited purchases of 10-year JGBs at a fixed rate of 0.11%, showing its determination to reduce yields amid the global bond sell-off.
As central banks from major economies are beginning to signal an exit from their aggressive economic stimulus, global investors are shifting their money away from government bonds, fearing the market will lose its monetary policy support.
In the wake of the rise in yields in Europe, 10-year yields in Japan have also climbed, rising from 0.08% on July 5 to 0.105% on July 7, exceeding the central bank target of 0%, set in September last year.
Although the rise in yields in Japan is similar to that in other parts of the developed world, the BoJ is reluctant to see the 10-year JGB yields increase too much, given its continued commitment to easing.
With this in mind, the BoJ attempted to reduce yields by two means: conducting fixed-rate operations and increasing its purchase operations.
On July 7, the BoJ increased its regular five- to 10-year JGB purchase operation to ¥500 billion from ¥450 billion. The central bank also simultaneously offered to buy benchmark 10-year JGBs at 0.11% in unlimited quantities. There were no bids, however, as the yield offered by the BoJ was higher than the market rate.
It was the third fixed-price operation announcement following operations in November 2016 and February 2017. It was also the first time that the BoJ had simultaneously offered both the unlimited fixed rate and an increase in regular outright JGB purchase operations, said Sayuri Shirai, professor at Keio University and a former policy board member of the BoJ in a recent article for Central Banking.
On July 12, the BoJ increased the amount of its three- to five-year JGB purchases to ¥330 billion from ¥300 billion.
Observers view these operations as a strong message to show the BoJ’s determination to stay with accommodative policies. “The BoJ’s announcement gave an opportunity for the market to reconfirm that the BoJ’s defence line is 0.11%, as was the case in February 2017,” Shirai said.
“As the BoJ has become more aggressive in its JGB market intervention, we believe market participants will likely take on short-term long positions for selling into BoJ operations (ie, BoJ trades). Because of this, today’s [July 14] 20-year supply is likely to be received well in our view,” says Naka Matsuzawa, Japan rates strategist at Nomura Securities in Tokyo.
Some market participants believe the yield upcycle in US Treasuries and European government bonds markets since late June has paused. Others, however, expect the US 10-year yields to rise further in coming months, resulting in a widening in interest differentials and causing the yen to weaken further against the dollar, including Marcel Thieliant, senior Japan economist at Capital Economics.
The research firm’s year-end forecast for the yen against the US dollar is 120, implying an additional deprecation of the currency pair from the current level at 113.44.
The BoJ will hold its next two-day monetary policy meeting on July 19–20. Markets generally expect the BoJ will keep the current policy setting unchanged, but may raise its economic growth forecasts and cut the inflation outlook.
“The central bank is expected to put more emphasis on its yield curve control measures than on its asset purchase programme and accept a weaker currency,” note Christian Nolting, global chief investment officer (CIO) and Tuan Huynh, CIO for Asia-Pacific at Deutsche Bank Wealth Management.