Rising US Yields Support Japanese Rates and Test BOJ Policy

  • BOJ proposes to pump 2,000 billion yen through temporary bond purchase
  • The 10-year benchmark JGB hits 0.110%, its highest since April 2021
  • Key return still in a loose range BOJ hangs around target

TOKYO, Jan.6 (Reuters) – A surge in U.S. Treasury yields pushed Japanese long-term interest rates up to their nine-month high on Thursday, testing the central bank’s resolve to cap borrowing costs around zero.

The Bank of Japan on Thursday offered to buy medium- and very long-term government bonds, along with a separate offer to inject 2,000 billion yen ($ 17.22 billion) into the markets between the January 7 and 14.

The announcement came as the benchmark 10-year Japanese Government Bond (JGB) yield hit 0.110% on Thursday, the highest since April 6 of last year, following a steady rise in Treasury yields. American.

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While the BOJ has tools to fight against unwanted yield gains, a sustained rise in US interest rates could call into question the central bank’s commitment as part of its yield curve control policy. (YCC) to cap 10-year returns around zero.

“It feels like Japanese and EU rates are just following movements in US rates. As for Japan, I think discussions of a BOJ policy change could arise towards the end of the year. year, “said Takafumi Yamawaki, head of fixed income research in Japan at JPMorgan. Securities.

“Some hedge funds may seek to test YCC” before Governor Haruhiko Kuroda’s term expires next April, he said. “But not many people think about it at this point.”

As part of efforts to keep inflation up to its 2% target, the BOJ guides short-term interest rates to -0.1% and 10-year JGB yields around 0% via an aggressive silver print.

In response to concerns that its massive bond purchase program is draining market liquidity, the BOJ decided in March to allow the 10-year rate to fluctuate 0.25% around its target of 0%. Read more

Few analysts expect the 10-year yield to cross the 0.25% cap anytime soon, due to continued investor appetite for bonds and the BOJ’s huge presence in the JGB market .

With inflation well below the central bank’s 2% target, Governor Kuroda has repeatedly stressed that the BOJ is ready to keep rates ultra-low even as the US Federal Reserve contemplates rate hikes.

Recent volatility will test the BOJ’s efforts to allow market forces to boost returns – but not too much to threaten YCC, analysts say. It also highlights how BOJ policy will continue to be influenced by Fed moves.

“It will all depend on the Fed’s actions on whether Japanese bond yields continue to rise,” said Noriatsu Tanji, chief bond strategist at Mizuho Securities.

($ 1 = 116.1700 yen)

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Additional reporting by Tetsushi Kajimoto, Daniel Leussink and Kantaro Komiya Editing by Sam Holmes and Jacqueline Wong

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