BOJ Makes Sweeping Cuts to Bond Purchases to Steepen Curve

(Bloomberg) -- The Bank of Japan made sweeping cuts to bond purchases a day after saying it wants a steeper curve and won’t allow a prolonged decline in yields.

Having kept its policy settings unchanged on Thursday, the central bank used its regular operation on Friday to lower buying across three maturity zones by a combined 50 billion yen ($463 million). That’s the first time it has cut purchases in three segments simultaneously since introducing the yield-curve control in 2016.

The BOJ is stepping up its fight against lower yields after a global debt rally saw Japan’s 10-year benchmark breach the bottom of its targeted range and slip to the brink of a record low of minus 0.3%. The central bank wouldn’t allow yields to fall for a prolonged period, and it was desirable for the yield curve to steepen a bit, Governor Haruhiko Kuroda said at a news conference Thursday.

“Reducing purchases right after Kuroda’s comments on the 10-year and super-long yields Thursday leaves a stronger impression that the BOJ is ready to act even if markets aren’t expecting it,” said Takenobu Nakashima, a senior rates strategist at Nomura Securities Co. in Tokyo.

Japan’s yield curve steepened in response to the action. The 10-year yield rose as much as two basis points before being half a basis point higher for the day at minus 0.22% as of 5:27 p.m. in Tokyo. It slid to a three-year low of minus 0.295% on Sept. 4, dropping further out of the BOJ’s targeted band of about 20 basis points above or below zero percent.

The 20-year yield increased as much as three basis points while that on 30-year securities climbed as much as 4.5 basis points before paring their advance. The yen was 0.1% higher at 107.93 per dollar.

The BOJ’s decision to stay put this week followed rate cuts by the Federal Reserve and the European Central Bank to prop up growth amid a global slowdown. An easing action now looks more likely in October after the BOJ also ordered a review next month.

With Friday’s move, the BOJ may have sought to reinforce the impression that its framework of targeting short and long-term rates, including the 10-year yield, is robust and sustainable.

The yield curve control policy for stimulating the economy and prices has looked increasingly strained in recent weeks. With yields plunging, some economists have cast doubt on whether the central bank could effectively maintain a floor on the loose trading range of the 10-year yield it permits around its 0% target.

“Coming a day after it said it will reexamine conditions next month means the cut in purchases has a message: the BOJ is aiming for a steeper curve,” said Mari Iwashita, chief market economist at Daiwa Securities Co. in Tokyo. “It’s not only the yield levels they are watching.”

‘Breathing Room’

Long-term rates that fall too much may squeeze profit margins for pension funds and insurers, as well as affect consumer sentiment, Kuroda said on Thursday.

Friday’s reduction in purchases of bonds maturing in more than 25 years was the BOJ’s first since April 19. Buying in the key five-to-10 year zone was lowered for the third time in six weeks, while the 10-25 year zone saw purchases being cut the second time this month.

The expansive reduction should lend some “breathing room” for the BOJ, said Nakashima of Nomura. “It may not be so aggressive in cutting bond purchases” in coming operations, he said.

--With assistance from Brett Miller and Christopher Anstey.

To contact the reporter on this story: Chikako Mogi in Tokyo at cmogi@bloomberg.net

To contact the editors responsible for this story: Tan Hwee Ann at hatan@bloomberg.net, Shikhar Balwani, Paul Jackson

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