The Bank of Japan unleashed an unlimited bond-buying program
Haruhiko Kuroda, the Bank of Japan governor. Thomson Reuters
The Bank of Japan on Thursday fired a warning shot to markets by offering to buy unlimited bonds for the first time under a revamped policy framework, as domestic debt yields surged in the wake of Donald Trump's upset US election victory.
Haruhiko Kuroda, the BOJ governor, said the central bank would not stand idly by as Japanese government bond yields jumped in sympathy with moves in US Treasurys, taking the challenge to markets as policymakers tried to keep borrowing costs low to spur stubbornly low inflation.
The BOJ offered to buy an unlimited amount of bonds at minus 0.04% in the five-year JGB notes and minus 0.09% in the two-year paper, employing a method the bank unveiled in September to achieve its new policy to control the entire yield curve rather than just short-term interest rates.
The market's response was quick, with the five-year JGB yield falling back to minus 0.095% from minus 0.065%. The two-year yield fell to minus 0.150%, down 4.0 basis points on the day.
The BOJ's bond-buy offer attracted no bids as market players can sell them at a lower yield, or a higher price, in the market.
"They offered to buy at yields above the market's levels," said Naoya Oshikubo, a yen rates strategist at Barclays. "So this was aimed more at containing rise in yields rather than pushing them down."
Ten-year JGB futures rose by as much as 0.40 points after the BOJ's operation, the biggest gain since the BOJ started the "yield-curve control" policy.
The BOJ's move followed rising expectations of reflationary policies under a Trump administration that sank Treasurys and sent JGB yields above the rough targets the BOJ set in September.
The short-term bond yields have risen sharply in particular.
The five-year yield hit a nine-month high of minus 0.04% on Wednesday, about 17 basis points above its levels just before the BOJ's September and November meetings.
Announcing the policy revamp in September after years of massive money printing failed to spur sustainable growth and stoke inflation, the BOJ said to control JGB yields it would buy bonds at a fixed rate if needed and set an explicit target of "around zero percent" for the 10-year yield.
"Because the BOJ now fired a shot, people have probably realised that they don't need to do panic-selling," said Koichi Sugisaki, the vice president of research at Morgan Stanley MUFG Securities.
A Bank of Japan official told Reuters on Thursday the BOJ undertook those operations following a rise in short- and medium-term bond yields.
Kuroda told the upper house financial affairs committee that the BOJ was ready to fight off unhelpful market moves.
"Moves in Treasurys do have an impact on Japanese bond yields," he said.
"That does not mean we have to automatically accept gains in Japanese bond yields every time Treasury yields rise."
Still, the Japanese bond market remained shaky with many investors rattled by the unexpected losses after the selloff in US and other sovereign bonds.
The auction of 20-year JGBs on Thursday highlighted limited appetite for bonds. The tail, or the gap between the lowest and the average price, was 0.40, the widest in seven months, pointing to investor caution given uncertainty over the outlook for Treasurys.
(Reporting by the Tokyo markets team, Stanley White; Editing by Shri Navaratnam)
