Japan’s benchmark government bond yield pierced the central bank’s ceiling amid speculation that policymakers are discussing loosening their tight grip on interest rates.
The 10-year yield climbed to 0.505% on Friday, beyond the Bank of Japan’s cap of 0.5%, as pressure builds on the BOJ to adjust policy. While a majority of economists had projected the central bank would stand pat this week, the Nikkei reported that officials would discuss letting yields rise above its current limit by a “certain degree.”
The impact of the potential shift by the BOJ is reverberating globally. Treasury yields extended rise Thursday while rates on 10-year sovereign bonds in Australia and New Zealand opened sharply higher. The yen is now in its fifth day of advances versus the dollar. Bank stocks rose in Tokyo on hopes that higher yields would boost margins.
Should the Nikkei report prove correct, the market could test the BOJ’s tolerance, Toru Suehiro, chief economist at Daiwa Securities Co. in Tokyo, wrote in a research note. “The reported tweak would buy the BOJ time and could be seen as ending up prolonging yield-curve control.”
Daiwa Securities Co. chief market economist Mari Iwashita warned that a tweak could backfire by actually inviting more upward pressure on rates.
Japan’s bonds were further weighed down by a faster-than-expected gain in the consumer-price indexes in Tokyo. Prices excluding fresh food and energy climbed to a fresh four-decade high, underscoring stubborn inflationary pressures.
“The Tokyo CPI data will be supportive for foreign investors to short JGB futures,” said Shoki Omori, chief desk strategist at Mizuho Securities Co. “Markets are already pricing in the risk of BOJ taking away daily fixed-rate bond-buying operations and possible adjustments to the securities lending facility.”
The operations went ahead this morning. The BOJ offered to purchase unlimited quantities of 10-year bonds and futures-linked securities at a fixed yield of 0.5%. It refrained from conducting any additional bond-purchase operation to address this morning’s spike in yields.
To be sure, some reports of BOJ policy shifts have proved wrong in the past. Earlier this month Bank of Japan officials saw little urgent need to address the side effects of the yield-curve-control program at this point, though they expected to discuss the issue, according to people familiar with the matter.
Governor Kazuo Ueda said last week that the BOJ has continued with monetary easing under yield-curve control with a “premise” that there is still some distance to stably hitting its inflation target.
A BOJ shift would have significant implications for global fund flows. Japanese investors are the biggest foreign holders of US government debt, and also own sizable amounts of European and Australian bonds, among other assets. Some investors are concerned that higher yields at home may lead Japanese institutions to sell overseas holdings and bring that cash home.
In December when the BOJ doubled the cap on 10-year bond yields to 0.5%, the yen rose sharply, yields on government bonds jumped and the fallout touched everything from US stocks to the Australian dollar and gold.
Meanwhile, the yen strengthened more than 0.5% to near 138.70 per dollar on Friday amid bets that a narrower yield differential between Japan and other economies would support the currency.
“If they end up adjusting tolerance by 25 basis points, then USD/JPY will get closer to 135-136 area,” said Bipan Rai, CIBC’s global head of foreign-exchange strategy. “Complete abandonment of the control takes us closer to 120 over time.”
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