Ueda reaffirms BoJ’s exit from controlling long-term rates

The Bank of Japan governor has said the rise in Japanese government bond yields in recent weeks is a natural reflection of market expectations, thus reaffirming the bank’s plan to let markets decide long-term interest rates.

Speaking to the country’s parliament today (March 12), Kazuo Ueda said long-term rates should be primarily determined by market forces. “It’s natural for long-term rates to move in a way that reflects such market forecasts,” he added.

Yields on Japanese government bonds (JGBs) rose above 1.5% last week, a level not seen since the global financial crisis. This prompted investors to ask whether the BoJ should step in. However, Ueda waved away these concerns, saying there was “no big difference” between the markets’ view on bond yields and that of the BoJ.

The surge in JGB yields was partly due to spillovers from the proposed reforms in Germany, where the incoming government aims to relax the country’s debt ceiling. This has prompted investors to sell Bunds in anticipation of further issuance of these instruments and of stronger German growth. This, in turn, has caused government bond yields to rise globally.

Predictions of further rate hikes from the BoJ have also contributed to the rise in JGB yields. Although the bank is expected to hold rates next week, markets are pricing in additional hikes this year, especially since BoJ officials have been reaffirming the direction of travel.

Last week, deputy governor Shinichi Uchida said the bank would continue to raise rates if economic data met its projections. He rejected the idea that doing so would hurt the economy, given the weakness of its recovery thus far, and argued that raising productivity would foster growth.

Uchida’s message on JGBs was similar to Ueda’s. The deputy governor said the BoJ’s plan to reduce JGB purchases and let markets determine long-term rates “remained valid” and that the bank would only intervene in “an exceptional situation”.

The BoJ ended its negative interest rate policy and yield curve control framework last March. Before that, the bank had sought to keep the yields on 10-year JGBs low by actively purchasing them in the open market.