BOJ Steps Up Fight to Stop Yields From Hitting All-Time Lows
BOJ Cuts Buying of Benchmark Bonds as Yields Near Record Low
(Bloomberg) --
The Bank of Japan intensified its efforts to stop benchmark yields from falling to record lows by cutting bond purchases on Friday and then paving the way to reduce them further in the coming month.
The central bank followed up on a 50-billion yen ($470 million) reduction in purchases of five-to-10 year debt this morning with a move to lower the buying range for this key maturity zone at its operations in September.
Speculation the BOJ would step in to halt the slide in yields was running high as the global debt rally caused the 10-year yield to drop further out of the central bank’s target range. Having come within one basis point of an all-time low of minus 0.3% on Thursday, the yield rose following BOJ’s actions on Friday, with that on similar-maturity U.S. Treasuries also moving higher.
“The BOJ showed its stance by tapping the brakes when yields are falling,” said Naomi Muguruma, a senior market economist at Mitsubishi UFJ Morgan Stanley Securities in Tokyo. “The reduction shows the BOJ isn’t totally ignoring the situation and just allowing markets to push yields lower.”
The BOJ is up against waning inflation at home and a slowing global economy that’s weighing on yields worldwide. It will continue to face pressure from the international bond rally given ongoing U.S.-China trade tensions, concerns about Brexit and the turmoil in Argentina and Hong Kong.
The central bank offered to buy 400 billion yen of five-to-10 year securities at Friday’s regular operation -- down from 450 billion yen previously -- marking the biggest cut to its purchases in the tenor since starting yield-curve control in 2016.
The bond-buying plan for September released later in the day showed it intends to buy between 250 billion yen and 550 billion yen of these notes at each operation next month. That’s versus a band of 300 billion yen to 650 billion yen for August.
Japan’s 10-year yield was up 1 basis point for the day at minus 0.28%, after rising to as high as minus 0.265% in immediate response to the operation. The BOJ in July 2018 said it would target a range of about 20 basis points above or below zero percent for the yield.
The yen rose 0.1% to 106.43 per dollar.
Market Debate
Friday’s twin steps come as the sustained rally in global debt markets saw yields in Japan continue to decline even after the BOJ cut purchases of five-to-10 year bonds on Aug. 16, which was the first reduction in the zone since December.
Traders in Tokyo had been debating over what actions the BOJ could take, with tapering bond purchases considered to be the easiest option for the central bank.
READ: Here’s How Tokyo Traders See the BOJ Stopping the Yield Decline
Speculation over widening the yield band has also been rife among market watchers, while some others have indicated the possibility of the BOJ putting a limit on the yield investors can offer at its buying operations, effectively setting a floor on rates.
The BOJ’s policy meeting on Sept. 18-19 is widely expected to provide more insight into its thinking.
For now, the central bank’s action Friday should make “investors wary of the minus 0.3% level,” said Naoya Oshikubo, a senior economist at Sumitomo Mitsui Trust Asset Management Co. The 50 billion yen cut was “aggressive” and will be “effective in slowing the pace of the yield drop,” he said.
--With assistance from Kazumi Miura.
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, Brett Miller
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