Japan Provides Flexible Bandwidth For Government Bond Yields To Fluctuate

Japan Provides Flexible Bandwidth For Government Bond Yields To Fluctuate

OpenLife Nigeria reports that the Bank of Japan unexpectedly tweaked its monetary policy framework on Friday, providing more flexible bandwidth for government bond yields to fluctuate.

The nine-member board’s decision – an 8-1 majority vote — will allow 10-year Japanese government bond yields to rise above the current cap of 0.5%.

While it maintained its policy of guiding yields 50 basis points above or below 0%, it added new wording in a statement, saying “it will conduct yield curve control with greater flexibility, regarding the upper and lower bounds of the range as references, not as rigid limits, in its market operations.”

“The Bank will offer to purchase 10-year JGBs at 1.0 percent every business day through fixed rate operations, unless it is highly likely that no bids will be submitted,” the statement said.

The market turned volatile after the announcement, as it digests the impact of the policy tweak. Japanese yen rose to 138.64 per dollar, only then to fall to 141.07.

The Nikkei Stock Average extended its loss during the afternoon session, falling over 700 yen.
Long-term interest rates rose sharply in the bond market Friday morning ahead of the BOJ’s policy announcement, with the 10-year yield crossing the BOJ’s ceiling of 0.5% for the first time in more than four months.

Unlimited bond purchase operations will continue to be held every day to keep the yields from moving outside the range. The BOJ also has other measures in place to control the yield curve, including curbs on JGB short-selling and long-term fund supply designed to encourage JGB purchases.

The move comes as inflation in Japan has become more embedded than the BOJ previously expected. The central bank projected that the core consumer price index, which excludes fresh food, will increase 2.5% during the fiscal year ending March 31, 2024, from a year earlier. The projection in its previous forecast was 1.8%.

Japan’s core CPI hit 3.3% in June, the 15th straight month above the 2% inflation target, accelerating from 3.2% in the previous month. The BOJ, however, projected a 1.9% rate of inflation for fiscal 2024.

A survey has showed that 73% of market economists expected there would be no change to the BOJ’s policy framework at this meeting.

The BOJ’s accommodative policy sharply contrasts with the global trend. The U.S. Federal Reserve once again raised policy rates by 25 basis points on Wednesday, marking its 11th rate hike in its last 12 meetings. The European Central Bank on Thursday raised its benchmark rate back to a record high of 3.75%.

The BOJ’s low interest rate policy has made the yen a relatively unattractive investment and vulnerable to selling. The yen hit its weakest level of 145 against the greenback this year on June 30.