Japan govt bond breaches yield cap, BOJ steps in with buying, loans

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A woman using her smartphone takes a photo of the headquarters of Bank of Japan in Tokyo

By Junko Fujita

TOKYO (Reuters) -Japan’s 10-year government bond yield on Wednesday breached the top end of the Bank of Japan’s policy band for a second straight session, prompting the central bank to step into the market with emergency bond buying and offering of loans.

Investors have renewed their attack on the BOJ’s ultra-loose interest rate stance, expecting the central bank to abolish its yield curve control (YCC) policy after incoming governor Kazuo Ueda takes the helm in April.

The yield on 10-year JGBs climbed to 0.505% on Wednesday, breaking through the central bank’s 0.5% cap and marking its highest level since Jan. 18. It last traded at 0.5%.

The BOJ bought 300 billion yen ($2.2 billion) of Japanese government bonds with maturities of five to 10 years and 100 billion yen of bonds with maturities of 10 to 25 years.

“The emergency bond buying was a surprise as the latest attack on the BOJ’s policy is still at the beginning,” said Keisuke Tsuruta, fixed income strategist at Mitsubishi UFJ Morgan Stanley Securities.

The JGB yields tracked U.S. Treasury yields, which hit three-month highs overnight as strong economic data led investors to price in higher interest rates, Tsuruta said.

Masayuki Koguchi, general manager of Mitsubishi UFJ Kokusai Asset Management’s fixed income division, said he expects the BOJ to conduct emergency operations when yields rise at least until the next policy meeting in March.

“But it is questionable whether that is effective,” he added.

In its struggle to contain elevated yields, the BOJ bought a record 23.69 trillion yen ($175.69 billion) worth of government bonds in January.

Foreign investors have been particularly active in attacks on the BOJ’s policy. They sold a monthly record of more than 4 trillion yen in JGBs in January, data from the Japan Securities Dealers Association showed.

In order to deter speculation, the BOJ last week quadrupled the minimum fee charged to financial institutions for borrowing some 10-year Japanese government bond notes, effective from Feb. 27.

The five-year JGB yield rose to high as 0.245% on Wednesday, its highest since Jan. 18, before easing to 0.240% after the BOJ announced it would provide 5-year loans against collateral to financial institutions.

The loan operation, the BOJ’s fourth of this kind, is aimed at encouraging investors to buy 5-year bonds and to lower interest rate swaps in the same maturity that move along with the 5-year JGB yield.

($1 = 134.6800 yen)

(Reporting by Junko Fujita; Editing by Muralikumar Anantharaman, Edwina Gibbs and Kim Coghill)

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