[Tokyo 14th Archyde.com]–The Bank of Japan has come to stop the rise in interest rates using a “limit operation”. Yen interest rates are expected to fall once due to the tightening situation in Ukraine. However, global inflation is accelerating and upward pressure on interest rates is unlikely to fall. If a large amount of government bonds are purchased through operations to curb the rise in interest rates, it may be perceived as strengthening monetary easing and the yen may depreciate. If import inflation is spurred, there is a risk that consumers may become dissatisfied.
It was an unusual announcement. The Bank of Japan announced that it will carry out a “limit operation” for 10-year bonds on the 14th following 6 pm on the 10th. It was announced that the next business day would be implemented at a time when there were almost no Japanese market participants, not during trading hours as it was three and a half years ago, in response to the recent sharp rise in interest rates. There are many views in the market.
With the US Consumer Price Index (CPI) expected to come out in January, the rise in Japanese 10-year government bond yields has not stopped, and the BOJ temporarily dropped 0.230% on the evening of the 10th. It reached the highest level since January 22, 2016, before deciding to introduce an interest rate policy.
Harumi Rokka, Senior Market Economist at Mitsubishi UFJ Morgan Stanley Securities, said, “Japan has three consecutive holidays, so depending on the situation of overseas markets, there was a risk that it would suddenly exceed 0.25% on Monday following the beginning of the week.” Pointed out. He suspects that he has proactively announced a limit operation to prevent unexpected rises in interest rates.
The “limit price operation” is a powerful means of curbing the rise in interest rates by purchasing an unlimited amount of government bonds at a fixed interest rate (0.25% this time). If the yield on 10-year government bonds exceeds 0.25% from the early morning of the 14th, the Bank of Japan will buy government bonds at a higher price than the actual price, and there is a risk of a flood of sales.
<World inflation does not stop>
This time, the situation in Ukraine is becoming tense, and interest rates on government bonds in the world are declining, so it is expected that interest rates on Japanese 10-year bonds will also decline on the 14th. If the prevailing interest rate is 0.25% or less, it is expected that there will be almost no bid for the “limit price operation”.
However, global inflation has not shown any signs of easing, and upward pressure on yen interest rates may continue. The US CPI (seasonally adjusted) for January, announced on the 10th, rose 7.5% year-on-year to the highest level in regarding 40 years.
Geopolitical risk is a factor that lowers interest rates, but there is also the problem of the gas pipeline “Nord Stream 2” that connects Germany and Russia over Ukraine, and there is a possibility that it will be a factor that raises interest rates due to inflation through supply constraints.
Takenobu Nakajima, chief interest rate strategist at Nomura Securities, said that the Japanese bank’s strong interest rate restraint stance in the market on the 14th will stop the rise in interest rates once, but “the entire global bond market is inflated. We are in a phase of rising global interest rates once morest the backdrop of progress. It is unlikely that interest rates on yen bonds will turn downward. “
If upward pressure on interest rates from overseas increases, the Bank of Japan will be forced to move as long as it adopts a yield curve control (YCC) policy that guides long-term and short-term interest rates to target levels.
The Bank of Japan also has a more powerful means of curbing interest rate rises, called the “continuous limit price operation” introduced in March last year. In addition to that, the Bank of Japan has abundant “tools” to curb the rise in interest rates, such as temporary operations and increased purchases. There are many voices in the market saying, “If the Bank of Japan moves, interest rates will stop rising” (domestic securities).
However, if the BOJ buys a large amount of government bonds in operation, it might cause another problem. Import inflation due to the weak yen. If the large-scale purchase of government bonds is perceived as strengthening monetary easing, it will cause the yen to depreciate. The merits and demerits of the depreciation of the yen are controversial, but if the rise in import prices due to the depreciation of the yen leads to consumer dissatisfaction, it may put the Bank of Japan in a difficult position.
In fact, the yen depreciated in the foreign exchange market following the Bank of Japan notified the “limit operation” on the 10th. “The depreciation of the yen in this way raises concerns regarding high prices among the people through the depreciation of the yen, and may lead to strong criticism of the Bank of Japan’s policy, which does not normalize monetary policy unlike other central banks.” Takahide Kiuchi, executive economist at Nomura Research Institute, points out.
The last time the Bank of Japan conducted a “limit price operation” was in July 2018. While the BOJ’s sense of caution regarding financial normalization is increasing in the market, the rise in interest rates does not stop with a single “limit operation”, and in the end, the governor of the Bank of Japan, Haruhiko Kuroda, said that the fluctuation range of long-term interest rates was plus or minus 0.1%. He said that it was supposed to be doubled, and the range was virtually expanded.
Inflation has not stopped all over the world, and central banks in each country are leaning toward rate hikes and hawks, and the Bank of Japan’s policy revisions are “quite seriously conscious of foreigners” (foreign-affiliated securities). If market risk appetite recovers, it is possible that the BOJ will “try” once more.
(Edited by Daiki Iga: Nobuhiro Kubo)
