BOJ Seeks to Rein in Yields With Second Fixed-Rate Operation

(Bloomberg) -- The Bank of Japan offered to buy an unlimited amount of bonds for a second time this week, seeking to tame a yield increase spurred by speculation it may adjust its ultra-loose monetary policy. Yields and the yen fluctuated.

The offer, made at 0.10 percent for the 5-10 year maturities, attracted some 94 billion yen ($847 million) of bids which were all accepted, according to the central bank. The yield level the BOJ bought at is down from the 0.11 percent offered in four previous operations for the zone.

While the central bank said the fixed-rate operation was conducted to meet its policy objective of keeping the 10-year yield around zero percent, traders would look for clarity when Governor Haruhiko Kuroda announces the latest decision on July 31. Any change would be the first since September 2016, when the BOJ introduced the yield curve control in a bid to manage the impact of its bond purchases and negative interest rate.

“The BOJ wants to send a message that the level for fixed-rate operation isn’t set in concrete,” said Shuichi Ohsaki, chief rates strategist for Japan at Bank of America Merrill Lynch Securities Ltd. in Tokyo. The decision to lower the yield for its offer to 0.1 percent indicates the BOJ will tweak its policy at the meeting, such as stealthily moving the 10-year yield levels higher, he said.

BOJ Seeks to Rein in Yields With Second Fixed-Rate Operation

The 10-year yield was 1.5 basis points higher at 0.10 percent as of 4:49 p.m. in Tokyo, after earlier climbing to 0.105 percent. It has more than tripled from last Friday after media reports suggested that BOJ officials are debating ways to mitigate the side effects of its policy on the profits of lenders. The yen was up 0.2 percent at 111.03 against the dollar.

The speculation over BOJ policy has roiled global markets and caused yield curves in Japan and other countries -- including the U.S. and Australia -- to steepen as traders hedged against the possibility of the Asian nation’s bond funds pivoting home.

This is only the sixth time that the BOJ has offered to buy an unlimited amount of bonds since the introduction of the YCC, and the first instance where it has had to conduct two such operations in one week.

The purchases on Friday was significantly less than the 723.9 billion yen the BOJ bought in February 2017, the only other time that an offer led to purchases.

The dilemma for Governor Haruhiko Kuroda is that even as calls to adjust policy grow louder, persistently weak inflation dictates the need to maintain stimulus. Winding it back would strengthen the yen, further undermining efforts to spur price-gains, while also hitting Japanese exporters.

Stealth Tapering

While Kuroda and his board have said they would consider discussing an exit from the stimulus policy from fiscal 2019, they have also consistently reiterated that there would be no change until the BOJ’s inflation target of 2 percent has been reached.

Still, the BOJ has been conducting “stealth tapering” by slowly cutting bond purchases over time. It added slightly less than 50 trillion yen worth of government debt to its balance sheet in the year through March, much lower than its publicly-stated target of expanding the monetary base by 80 trillion yen annually.

“We believe the BOJ will not change monetary policy by daily operations without an official announcement through its policy statement,” said Yoshinori Shigemi, global market strategist at J.P. Morgan Asset Management Ltd. “They are also unlikely to explicitly raise the 10-year target level in the meeting next week, though, as we have seen, the BOJ may allow a wider floating range in the 10-year bond yield or tweak their ETF & corporate bond purchase program.”

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