Kuroda Shoots Down Wider 10-Year Range, Sends Yields Tumbling

Bank of Japan Governor Haruhiko Kuroda appeared to play his surprise card early as he shot down the idea of widening the trading range for benchmark yields ahead of a policy review, triggering a market tumble.

Kuroda dropped a bombshell in response to a question in parliament about whether the central bank was planning to allow more movement around the 10-year yield target of zero.

“Personally I believe it’s neither necessary nor appropriate to expand the band,” Kuroda said, ending months of speculation. “There’s no change in the importance of keeping the yield curve stable at a lower level” amid the pandemic, he added.

The yield on the 10-year Japanese government debt briefly dropped as much as 8 basis points from its intraday high to 0.070% in the aftermath of Kuroda’s comments, as traders had to reconsider their assumptions on what the March 19 review has in store. The yen also weakened and stocks pared some losses.

Kuroda Shoots Down Wider 10-Year Range, Sends Yields Tumbling

Other maturities were also hit, with the 30-year bond yield sliding more than 12 basis points from its intraday high, for its widest swing since April 2016.

Kuroda highlighted factors that make it difficult to widen the range compared with the BOJ’s previous move to double the movement band in July 2018. He said the bank wanted to keep the whole yield curve low as the economy recovered from the pandemic in contrast with the steady growth outlook back in 2018.

“Kuroda is making it crystal clear higher rates aren’t needed when the BOJ still needs to continue monetary easing,” said Yoshimasa Maruyama, chief market economist at SMBC Nikko Securities. “This makes it very likely there will only be minor changes in the management of yield curve control at the review.”

The BOJ chief’s remarks come after more than two months of speculation that the central bank was considering widening the range from the existing level of around 0.2 percentage point either side of zero to help improve functioning of the bond market and to allow a slight steepening of the yield curve.

“Considerably more discussion is needed on this point,” Kuroda said before later clarifying he didn’t think such a move was necessary.

Kuroda spoke just a matter of hours after Federal Reserve Chair Jerome Powell sounded a gentle note of caution to bond markets that stopped short of trying to rein in a jump in long-term interest rates.

“There was no way Kuroda wanted to sound in any way hawkish when Powell is striking a dovish tone,” said Mari Iwashita, chief market economist at Daiwa Securities Co. “Japan is lagging so far behind in terms of both inflation and vaccine distribution compared with U.S.”

The yen has weakened recently as the gap in interest rates bwrween the two nations widened, providing some relief to Japan’s export-reliant economy.

Recent gains in global yields may have made it more difficult for the BOJ to widen its range without giving the impression it is signing off on higher rates, a view that could be interpreted as a tacit tightening of policy.

Kuroda Shoots Down Wider 10-Year Range, Sends Yields Tumbling

In the run-up to the review the BOJ intends to defend its current range and could take action before the 10-year yield on Japanese government bonds reaches 0.2%, according to people familiar with the matter.

Kuroda is known for delivering his surprises on the day of decisions, so spilling the beans ahead of time shows the importance he places on managing market expectations ahead of the review.

There was still reluctance among some economists to accept that the wider band was now completely off the table. Kuroda announced the introduction of negative interest rates in January 2016 only days after saying in parliament he wasn’t considering it.

“While our main scenario as of today remains for the BOJ to seek to revive market mechanisms by expanding the band, there is a possibility that the BOJ may maintain the current stance on yield curve control if market stability isn’t regained by the time of the meeting,” said Naomi Muguruma, senior market economist at Mitsubishi UFJ Morgan Stanley Securities.

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