BOJ seeks to fend off bond bears on third day of debt purchases

 

To deal with speculation of a move to end excessively accommodative monetary policy, the Bank of Japan announced a third day of unscheduled bond purchases

The Bank of Japan announced a third day of unscheduled bond purchases as it battles against speculation it is moving toward ending its super-accommodative monetary policy.

The BOJ offered an unlimited amount of two-year notes at a yield of 0.04% and five-year loans at 0.24%. It also offered to buy a total of ¥700 billion ($5.3 billion) of one- to 10-year bonds and ¥300 billion of 10- to 25-year debt. This is in addition to a daily operation to buy 10-year securities and futures-linked securities in unlimited quantities at 0.5%.

The BOJ's struggle to contain rising local yields could have global consequences as investors in the country hold $2.4 trillion in foreign debt. Higher local yields could prompt Japanese investors to bring home more money, putting pressure on bonds around the world.

"Ripple from the BOJ move continues to affect markets," Martin Wetton, head of fixed income and currency strategy at the Commonwealth Bank of Australia, wrote in a research note. Out of pocket and home produce are certainly attractive."

The 10-year bond extended gains after the operation was announced, with its yield falling 4.5 basis points to 0.41%. The yen strengthened 0.4% against the dollar, even though efforts to cap bond yields are generally negative for the currency.

The BOJ this week conducted a combination of unlimited and fixed-amount purchases targeting targets of 10 years or less, and said Thursday it would offer two years of no-interest loans to banks next week. Earlier this month, the BOJ doubled the range on the 10-year yield to 0.5% to help improve market functioning.

Friday's announcements bring the amount of debt the BOJ can buy this month to 17 trillion yen, surpassing the previous record set in June.

Eisuke Sakakibara, a professor at Aoyama Gakuin University in Tokyo and a former deputy finance minister, said in an interview with Bloomberg Television last week that the BOJ could surprise markets again by tightening monetary policy as soon as next month.


The BOJ's decision to raise the 10-year yield ceiling was intended to improve market functioning, but the move triggered debt selling, necessitating even more debt purchases and threatened to further reduce liquidity.

Japan's core inflation gauge is climbing at its fastest pace in four decades, putting further pressure on policymakers.

"Honestly, I don't understand the BOJ's intent," Kazuhiko Sano, a three-decade bond veteran and chief bond strategist at Tokai Tokyo Securities Co., wrote in a note. Policy changes and increased bond purchases risk further reducing market liquidity."

The BOJ conducts two types of bond-buying operations, one with a fixed yield and the other for a fixed amount. In the former it buys an unlimited amount of debt at a predetermined yield. In the latter, it buys a fixed amount of bonds at the prevailing market yield.