2023-10-20 04:31:01
The Bank of Japan intervened in the Japanese government bond (JGB) market on Friday for the fifth time this month, following the 10-year yield hit a new decade high, pitting the BOJ once morest the forces of the market in a context of rising US yields.
The benchmark JGB yield climbed to 0.845% early in the day, its highest level since July 2013, following hitting record highs also the previous day.
But it eased immediately following the BOJ’s announcement, and was last 1.0 basis points (bps) lower than Thursday’s closing level at 0.83%.
The BOJ is capping the 10-year yield at 1% as part of its yield curve control (YCC) policy, following doubling it in a surprise decision at the end of July. However, the central bank has shown it will not tolerate sharp moves towards the ceiling, intervening on several occasions to curb the pace of increases.
“The BOJ is not trying to cap yield. It is sending a signal that moves should be gradual, not rapid,” said Masayuki Kichikawa, chief macro strategist at Sumitomo Mitsui DS Asset Management.
“I don’t know if the BOJ feels comfortable (with the level) or not, but 0.845% is still well below 1%. There is room for upside.
Policymakers have stepped up their interventions in recent weeks as Japanese rates succumb to the gravitational pull of U.S. yields. The 10-year interest rate briefly crossed the psychological 5% mark on Friday, for the first time in more than 16 years.
In its latest operation, the BOJ offered financial institutions five-year loans once morest collateral, deploying this tool for the second time this month. Its other conventional option is to make additional bond purchases, which it has done three times this month, including earlier this week.
Japan’s central bank is walking a tightrope with its bond market intervention, which risks tipping the yen to the weaker side of 150 to the dollar, a level many see as a red line for intervention in the foreign exchange market.
Yawning interest rate differentials have caused the yen to fall 7.1% once morest the dollar since the BOJ’s policy announcement on July 28, promising greater flexibility in conducting the YCC having been swept away by the relentless rise in US yields.
However, the exchange rate stabilized below 150 following briefly rising above that level at the start of the month, before falling sharply once more. Some assumed that authorities intervened in the foreign exchange market, but official data suggests that was not the case.
The weak yen is a key political factor, pushing up prices of energy and imported food at a time when Prime Minister Fumio Kishida may be considering early elections.
“If the yen crosses the 150 mark, of course it will be more difficult for the BOJ to intervene in the JGB market. But since the yen is stable, the BOJ is in a position to try to control interest rates long term and monitor the reaction of the foreign exchange market,” Mr. Kichikawa said.
“This is the kind of delicate balancing act the BOJ faces. (Reporting by Brigid Riley and Kevin Buckland; Editing by Shri Navaratnam)
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