BOJ Intervenes For Second Time This Week To Slow Yield Spike

The Bank of Japan headquarters in Tokyo, Japan. (Photographer: Akio Kon/Bloomberg)

(Bloomberg) -- The Bank of Japan came into the market for the second time this week to slow gains in benchmark sovereign bond yields, underscoring its determination to curb sharp moves in rates even as it makes room for them to rise.

The buying operation Thursday also highlighted the challenge investors face interpreting a rates regime that is built on gray lines to let the BOJ be flexible rather than provide clarity for markets. The impact was also felt immediately in the currency market, with the yen weakening. It triggered mild choppiness in the Tokyo stock market, which remained lower.

“Two observations do not make a pattern, but for now five basis points increments could be the BOJ's tolerance for movements higher in the 10-year Japan government bond yield,” said David Forrester, a strategist at Credit Agricole in Singapore. “Such a slow grind higher would help limit yen downside against the dollar in an environment of rising US Treasury yields.”

While the central bank adjusted policy on Friday to allow scope for 10-year yields to rise to 1%, its actions this week make it clear that it won't tolerate a rapid move to that level.

The announcement of the unscheduled operation Thursday came after the benchmark 10-year note touched a fresh nine-year high of 0.65%. It dropped back fractionally below this after the BOJ said it would buy 400 billion yen ($2.8 billion) of securities across various maturities.

The prospect of an increase in JGB yields is rippling through global bond markets. Japanese investors, with ultra-low interest rates at home, are the biggest foreign holders of US government debt and own everything from European bonds to Brazilian notes. Each incremental yield gain at home may boost the incentive for them to repatriate funds.

A gauge that tracks banks including Mitsubishi UFJ Financial Group Inc. swung from an intraday gain to a loss after the latest move by the BOJ. Banks are seen as beneficiaries of higher interest rates, which widen the margins they can make on lending after decades of struggling with Japan's ultra-low interest rates.

“It's too early to tell whether they are focusing on the level or speed at which yields rise,” Shoki Omori, chief desk strategist at Mizuho Securities Co., said of the BOJ. “The 10-year yield can go to 0.7% in a week if the BOJ's message remains unclear.”

The yen swung from a gain to a loss that made it the biggest laggard versus the dollar among Group-of-10 currencies.

“This is likely to cap prospects for lower USD/JPY in the near term amid a backdrop of rising US yields,” said. Moh Siong Sim, FX strategist at Bank of Singapore

--With assistance from Naoto Hosoda, David Finnerty and Ruth Carson.

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