Yen's Slide Keeps Tapering Alive for BOJ After Stimulus Talk

(Bloomberg) -- For all of Governor Haruhiko Kuroda’s recent musing over the possibility of more stimulus, a weaker yen means the Bank of Japan could continue to taper bond purchases.

The BOJ gave itself the option of buying fewer five-to-10 year bonds in March when it announced its monthly purchase plan on Thursday. The tweak came after the benchmark yield slipped to match its lowest level since November 2016, and spurred a steepening of the curve on Friday.

But perhaps more importantly, it is the yen’s 2.2 percent decline against the dollar in February, the biggest since September, that gave the BOJ breathing room. Just last week, Kuroda told lawmakers that the central bank would consider expanding stimulus if a stronger yen hurt efforts to inflate the economy.

“The BOJ has a tendency to be excessively sensitive to yen strength,” Chotaro Morita, chief rates strategist at SMBC Nikko Securities Inc., wrote in a note on Friday. “The central bank isn’t also comfortable with 10-year yields staying negative.”

Yen's Slide Keeps Tapering Alive for BOJ After Stimulus Talk

The 10-year yield was unchanged at minus 0.015 percent on Friday, while the 30-year yield rose 1 1/2 basis points to 0.615 percent. They slipped during February even as the central bank bought 6.2 trillion yen ($55.5 billion) of bonds, the smallest monthly amount in more than four years.

The curve has steepened “because of expectations that the BOJ will further cut bond purchases,” said Toru Suehiro, senior economist at Mizuho Securities Co. in Tokyo.

Japan’s yields have tracked the decline in Treasuries as the Federal Reserve signaled a pause to its rate hikes. Speculation that the BOJ may consider further stimulus was fanned when the nation’s January exports data missed forecasts.

This is the second time this year the BOJ has wrong-footed speculators betting that it would hold off on reducing bond purchases. On Feb. 12, it cut purchases of 10-to-25 year debt at a regular operation.

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