Japan Faces Speculators On Two Sides As Yen, Bonds Struggle

Japanese 10,000 yen banknotes.

(Bloomberg) -- The contradictions in Japan's efforts to protect the yen while slowing the pace of rising bond yields was on clear display in currency and debt markets on Wednesday.

The day began with the nation's top currency official at the finance ministry giving one of the starkest warnings yet that authorities were ready to intervene in the foreign exchange market to stem the yen's fall. By lunchtime the Bank of Japan was preparing to wade into the debt market to slow the speed of the 10-year bond yield's ascent toward 1%.

The BOJ's unscheduled bond purchases were jarring — coming just 24 hours after the central bank removed its 1% cap on these yields. The operation also worked directly against efforts to support the yen, which is being weighed down by the wide gulf between interest rates in Japan and the US.

The upshot for the currency was a modest 0.3% advance that left it near 151 versus the dollar and within 1 yen of a 33-year low. The 10-year bond yield was still up for the day and just 1.5 basis points below the fresh decade high it set before the central bank announced its buying operations.

“The MOF and BOJ's actions are out of sync,” said Tsuyoshi Ueno, senior economist at NLI Research Institute, who sees the answer to the problem lying out of their hands and in any future interest rate cuts in the US. “Until then, authorities will have to be patient.”

Speculators in both markets are betting that Japan's policymakers won't be able to maintain their balancing act, and the stakes are rising. An excessive yen depreciation could worsen Japan's inflation, in part by pushing up import prices, while higher yields could prematurely crimp Japan's recovery.

“We're on standby,” said Masato Kanda, the top currency official at the ministry, echoing language he used a year ago on the day Japan made the first of three forays into the market. “But I can't say what we'll do, and when — we'll make judgments overall, and we're making judgments in a state of urgency.

Read more: Japan Ramps Up Yen Intervention Warning After BOJ-Fueled Selloff

His comments followed the yen's biggest one-day drop since April on Tuesday after the BOJ's underwhelming tweak to its cap on bond yields showed that moves away from ultra-loose policy would likely continue to be slow and gradual.

Japan's stock market, on the other hand, saw the Topix index climb the most in more than a year because of the tailwind to equities from low borrowing costs and the yen weak.

“Yesterday's BOJ meeting led to a perception that long-term interest rates will not significantly exceed 1% for some time,” said Tomo Kinoshita, a global market strategist at Invesco Asset Management. “The weak yen is also positive for export stocks.”

While Japan's the 10-year benchmark yield had doubled since July 27, one day before Governor Kazuo Ueda made his first tweak to yield-curve control, it is still about four percentage points below its US equivalent.

The BOJ appears intent on moderating moves while traders are constantly trying to push yields higher.

“Although the BOJ took action to discourage rises in yields, market players probably want to see the long-term yield reaching 1%,” said Keisuke Tsuruta, a senior fixed-income strategist at Mitsubishi UFJ Morgan Stanley Securities Co.

He added that the unscheduled buying operation this time may have been a pre-preemptive move before a closely-watched 10-year bond auction Thursday.

BOJ Buys More Bonds to Slow Rising Yields a Day After Tweak

“At the bottom of the BOJ's thinking is its lack of assurance that they could achieve sustainable inflation of 2%, so a somewhat easy monetary policy needs to be maintained,” said Shusuke Yamada, head of Japan currency and rates strategy at BofA Securities Inc. “For the finance ministry, it's looking at volatility and trading levels for foreign exchange. Letting the yen weaken has disadvantages for consumers.”

--With assistance from Yumi Teso and Daisuke Sakai.

More stories like this are available on bloomberg.com