BOJ Cuts Bond Buying to Arrest Yield Slide Amid Global Rally

(Bloomberg) -- The Bank of Japan reduced purchases of bonds for the first time in two months, stepping in to arrest a decline in yields amid a global debt rally spurred by rising risks to growth worldwide.

Key Insights

  • The central bank offered to buy 180 billion yen ($1.6 billion) of securities maturing in 10-to-25 years at Tuesday’s regular operation, versus 200 billion yen previously. The last reduction in this zone was in July
  • Taking into account all maturities, the move is the first cut in purchases since Dec. 14
  • Bonds have rallied worldwide as investors seek the safety of fixed-income assets with economic growth forecasts from Europe to Australia being slashed. A dovish tilt in monetary policies of major global central banks including the Federal Reserve has also burnished debt’s appeal
  • BOJ’s move brings back the debate on tapering of debt purchases back into focus, as it came after yields on so-called super-long bonds fell to their lowest since late 2016 on Friday
BOJ Cuts Bond Buying to Arrest Yield Slide Amid Global Rally

Comments

  • “The cut is very significant in halting the drop in yields,” says Katsutoshi Inadome, senior fixed-income strategist at Mitsubishi UFJ Morgan Stanley Securities Co. in Tokyo. “The move came amid growing speculation in markets that the BOJ is holding off from tapering which was partly why the hunt for yields in super-long maturities has accelerated. But now that premise is removed”
    • “This suggests that the BOJ will likely resume its tapering when yields drop sharply”
  • “BOJ’s action will restrain attempts to rapidly flatten the yield curve,” says Naoya Oshikubo, a senior economist at Sumitomo Mitsui Trust Asset Management Co. in Tokyo. “The dollar-yen’s rebound above 110, recovery in Japanese stocks and the external-market environment were favorable for the BOJ to taper”
  • The yen’s reaction was limited as investors don’t see the BOJ’s reduction of purchases as a change in its monetary policy, says Koji Fukaya, chief executive officer at FPG Securities in Tokyo. The market thinks the BOJ will keep its ultra-loose monetary policy for a while and this shouldn’t affect the dollar-yen exchange rate

Market Moves

  • The benchmark 10-year yield was up one basis point at -0.02% after the move. It fell to -0.05% on Jan. 4, its lowest since November 2016
  • The yen erased early losses after BOJ’s move, before falling again on news that U.S. lawmakers reached a tentative deal to avert a second government shutdown. The currency was down 0.2% at 110.59 per dollar

Background

  • Recent market moves seem a little too sensitive, BOJ Governor Haruhiko Kuroda said at a news conference following the bank’s January policy meeting, adding that he doesn’t see a big change in economic fundamentals
  • Kuroda had in December said that Japan yields falling into the negative territory is not a problem if the moves reflect economic fundamentals
  • The BOJ aims to keep benchmark 10-year yields in a range around zero percent as part of its yield-curve control policy introduced in September 2016

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