The Bank of Japan seems to have reached a truce with bond traders betting that it should ditch an effort to control the yield on government debt, as a program to increase loans for banks to help ease new pressure on the Japanese bond market.
After more than a month of fighting big speculative bets by hedge funds with record purchases of government bonds, the BoJ last week opted to keep the main pillars of monetary policy at its most loose and has no plans to abandon yield curve controls. . The central bank also expanded its critical lending tool, a measure that helped rebound in Japanese government bonds.
Under the expanded lending program, the BoJ will offer loans of up to 10 years to banks at variable rates, instead of the previous fixed rate of zero percent.
Analysts said banks were likely to plow some of this cash back into the bond market, which will help stabilize the yield curve. In the first auction for the five-year fund on Monday, the BoJ received bids totaling ¥3.13tn ($24bn), three times the amount on offer, with an average successful bid yield of 0.145 percent.
“The market responded favorably to this program and the bid settled at just the right level with an average rate of 0.145 per cent, which suggests that banks will continue to take part in the next auction,” said Takenobu Nakashima, chief rate strategist at Nomura. “This increases the likelihood that yield curve control will be sustainable.”
During the BoJ’s fight against markets in early January, interest rates on Japan’s benchmark 10-year government bond rose above the central bank’s target ceiling of 0.5 percent, driven by traders who believed it could force outgoing governor Haruhiko Kuroda to withdraw his signature. wisdom.
Since Kuroda stood firm after the bank’s monetary policy meeting last week, Japan’s 10-year yield has fallen to 0.36 percent. On Monday, it traded close to that level at 0.38 percent after the BoJ conducted its first extended lending operation.
Kazuo Momma, the former head of monetary policy at the BoJ who is now an executive economist at the Mizuho Research Institute, said that by modifying the loan scheme it is usually applied to times of tight liquidity, such as after the Covid-19 pandemic or the global financial crisis. , the BoJ wants to demonstrate that it is willing to take unprecedented measures to control the yield curve.
“It is a clear message that the BoJ will continue its monetary easing measures by showing that it is willing to go ahead,” Momma said.
He added that the BoJ should strengthen its communication with the market after surprising investors in December by saying it would allow the 10-year bond yield to fluctuate by 0.5 percentage points above or below the zero target, replacing the previous band of 0.25 percentage points.
Since then, investors have challenged Kuroda’s claim that the move was not a tightening of monetary policy.
But analysts say it is not clear how long the detente will last, and whether the central bank’s latest move to bolster the operations of fund providers will be enough to restore stability to the Japanese government bond market. If last week’s decision clarified anything, according to one analyst, it is that the future of yield curve control policy is now in the hands of Kuroda’s successor from April.
Hideyasu Ban, a bank analyst at Jefferies in Tokyo, said the BoJ’s massive buying of Japanese government bonds since it began controlling the yield curve in 2016 has already owned about half the market, limiting the scope for banks to increase their own holdings.
Therefore, it is more likely that they will look for arbitrage opportunities in the swap market, where interest rates have recently risen higher than government bond yields as investors expect a tightening of monetary policy, according to Ban. The BoJ’s move, he said, gave the central bank greater flexibility to control the pace of rate hikes.
“Basically we see it as buying more time, mainly through the announcement effect,” said Naohiko Baba, Japan economist at Goldman Sachs.
Tohru Sasaki, chief forex strategist at JPMorgan, said the BoJ’s decision last week showed that concerns were still leaning more towards the risk of deflation than higher inflation.
Because it may take a long time to disprove the thesis, he said, the BoJ has committed to buying massive amounts of government bonds on top of its colossal purchases in December and the first half of January.
The enhanced funding operations are clearly aimed at lowering long-term rates, Sasaki added, but it is unclear whether they will be effective.
“If the BoJ continues its rapid purchases of Japanese government bonds, the BoJ’s holdings will reach 60 percent by mid-year,” he wrote in a note. “The longer they stay in control of the yield curve, the harder it is to get out. . . . there’s no way out of this quagmire.”