Tokyo, March 28 (BNA): The Bank of Japan (BOJ) defended its yield target on Monday by making two offers in one day to buy an unlimited amount of government bonds, as it struggled to swim against the global tide toward higher interest rates.
The central bank’s efforts to defend its loose policy pushed the yen to a six-year low of 123.25 per dollar on Monday, inflating imports of fuels and raw materials that had already surged, Reuters reported.
“The strength of the BOJ’s unlimited bond-buying offer is clearly diminishing,” said Takahid Kiyoshi, a former central bank board member who now works as an economist at Nomura Research Institute.
“Markets may test the BOJ’s resolve more aggressively to defend the 0.25% cap, which could prompt the bank to adjust its approach and allow the 10-year yield to rise further.”
The yield on the benchmark 10-year Japanese government bond (JGB) reached a six-year high of 0.250% on Monday, even after the Bank of Japan intervened in the market with an offer to buy unlimited amounts of Japanese government bonds to defend the implied 0.25%. Put a cap around the target return.
After the morning bid failed to lower yields, the Bank of Japan made a second bid in the afternoon to buy unlimited amounts of JGBs with maturities over five years and up to 10 years.
While the first offer did not meet any offers, the Bank of Japan accepted bids to buy 64.5 billion yen ($524 million) in Japanese government bonds in the second offer.
The two bids, the first since February 10, confirmed the BoJ’s intent to keep interest rates very low in contrast to the Federal Reserve’s aggressive plans to raise rates.
“Markets are putting the Bank of Japan on the line, so the central bank has no choice but to continue offering unlimited bond buying,” said Takafumi Yamawaki, head of Japan fixed income research at JPMorgan Securities.
“If yields are allowed to move above 0.25%, investors will think that the BoJ has held a rally above that level. This makes it difficult for the BoJ to continue to control the yield curve.”
Under Yield Curve Control (YCC), the Bank of Japan pledges to guide the 10-year JGB yield around 0% as part of efforts to stimulate the economy by keeping borrowing costs low.
The 10-year government bond yield has been increasing in parallel with the rise in long-term interest rates in the United States, as investors priced in the possibility of a rate hike by the Federal Reserve.
Markets were focused on when the BoJ could step in to defend the 0.25% cap, after refraining from doing so on Friday as the 10-year yield exceeded the level at which the central bank offered to buy an unlimited amount in February.
The current guidance of the BoJ is that it will allow the 10-year yield to move flexibly around its 0% target as long as it remains below the 0.25% upper limit, although it will take into account not only the level but the speed of any yield rise.
Bank of Japan Governor Haruhiko Kuroda has repeatedly said that the central bank will keep interest rates at the current ultra-low levels, given the fragile economic recovery and with inflation remaining well below its 2% target.
Analysts say growing complaints from politicians about a weak yen, which is inflating already soaring import costs in Japan, may complicate the BoJ’s efforts to keep yields too low.
The dollar rose nearly 0.95% to 123.25 yen on Monday, its highest level since December 2015. It has risen more than 7% so far in March, its biggest monthly gain in more than five years.
The Bank of Japan is in trouble. By capping rates at zero, it fuels declines in the yen that could hurt the economy by raising the cost of living for households and businesses.
“Frequently offering unlimited purchases of bonds may cast doubt on the feasibility of yield curve control,” said Shotaro Kojo, an economist at Daiwa Research Institute.
“It may also draw unwanted public attention to the weak yen, so the Bank of Japan will probably want to avoid intervening too much.”