The Bank of Japan appears to have reached a truce with bond traders betting it will have to give up efforts to control government bond yields, because of a program to expand lending to banks. The bank helps alleviate the recent unrelenting pressure on the Japanese bond market.
After more than a month of battling massive speculative bets by hedge funds with record purchases of government bonds, the BoJ last week choose to keep the main pillars on its extremely loose monetary policy and said it has no plans to abandon so-called yield-curve control. The central bank also expanded a key lending instrument, a measure that has aided the rally in Japanese government bonds.
Under the loan extension program, the BoJ will provide loans of up to 10 years to banks with variable interest rates, instead of the previous fixed rate of 0%.
Banks are likely to put some of this cash back into the bond market, analysts say, which should help stabilize the yield curve. In the first auction for five-year funds on Monday, the BoJ received bids totaling 3.13 trillion yen ($24 billion), more than triple the amount offered, at a rate The average successful bid rate is 0.145%.
Takenobu Nakashima, chief interest rate strategist at Nomura. “This has increased the chances that yield curve control will be sustainable.”
In BoJ’s fight against the market In early January, 10-year Japanese government bond yields rose above the central bank’s target ceiling of 0.5%, spurred on by traders who believed they could force the governor to Outgoing Haruhiko Kuroda rescinds her signed policy.
Since Kuroda stood firm after the bank’s monetary policy meeting last week, Japan’s 10-year yield has fallen to a low of 0.36%. On Monday, it traded close to that at 0.38% after the BoJ made its first extended lending operation.
Kazuo Momma, a former head of monetary policy at the BoJ who is now an executive economist at Mizuho Research Institute, said that by switching to a lending scheme typically reserved for periods 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 steps 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 this far,” Momma said.
He added that the BoJ needs to strengthen communication with markets after Investors stunned in December by saying it would allow 10-year yields to hover 0.5 percentage points above or below the zero target, replacing the previous 0.25 percentage point band.
Since then, investors have challenged Kuroda’s assertion that the move was not monetary tightening.
But analysts said it was unclear how long the de-escalation would last and whether the central bank’s latest move to boost capital supply would be enough to restore stability to the economy. or not. Japanese government bonds market. According to one analyst, if last week’s decision clarifies anything, it is that the future of yield-curve control is now in the hands of Kuroda’s successor from April.
Hideyasu Ban, a banking analyst at Jefferies in Tokyo, said the BoJ’s massive purchases of Japanese government bonds since it began yield-curve control in 2016 has left it with about half of the market. , limited scope for banks to increase holdings.
As a result, they are more likely to look for arbitrage opportunities in the swap market, where interest rates have recently moved much higher than government bond yields as investors anticipate policy. currency will tighten, according to Ban. The BoJ’s move is about giving the central bank more flexibility in controlling the rate at which interest rates rise, he said.
“We basically see it as a way to buy more time, mainly through the announcement effect,” said Naohiko Baba, Japan economist at Goldman Sachs.
Tohru Sasaki, head of foreign exchange strategy at JPMorgan, said last week’s decision by the BoJ showed that its concerns remained tilted towards the risk of deflation rather than higher inflation.
Because it can take a long time to refute that argument, he said, the BoJ has actually committed to buying large amounts of government bonds in addition to the massive purchases in December and the first half of January.
The increased fund supply activities are clearly aimed at lowering long-term interest rates, Sasaki added, but it is unclear whether that will work.
“If the BoJ continues to buy Japanese government bonds at this rate, the BoJ’s holdings will likely hit 60% by the middle of this year,” he wrote in a note. “The longer they control the yield curve, the harder it is to get out. . . There is no way out of this quagmire.”
