BOJ offers to buy unlimited 10-year bonds to defend yield ceiling.

028, Mar 2022

TOKYO (Reuters) The Bank of Japan on Monday offered to buy unlimited amounts of 10-year Japanese government bonds (JGBs) at 0.25%, stepping into the market to defend its implicit yield cap for the second time this year.

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The move came after the 10-year JGB yield crept up to a six-year high of 0.245% in early trade, just a half of a basis point shy of the BOJ's tolerance ceiling under its yield curve control policy.

The offer, which is the first since Feb. 10 and to be executed on Tuesday, pushed the dollar to a more than six-year high of 123.03 yen as investors focused on prospects of widening U.S-Japan interest rate differentials.

"The move, which was largely anticipated, will help curb rises in JGB yields," said Masahiro Ichikawa, chief market strategist at Sumitomo Mitsui (NYSE:SMFG) DS Asset Management.

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"This operation is a message from the BOJ that it will maintain ultra-easy policy for the time being," he said.

The 10-year JGB yield has been creeping up in tandem with a rise in U.S. long-term interest rates, as investors have priced in the prospect of aggressive rate hikes by the Federal Reserve.

Markets had been focusing on when the BOJ could step in to defend the 0.25% ceiling, after refraining to do so on Friday as the 10-year yield topped the level at which the central bank had offered to buy an unlimited amount in February.

"In light of recent moves in long-term interest rates, we made the offer to ensure we abide by the board's guidance to have the 10-year JGB yield move around the 0% target," a BOJ official told Reuters.

The BOJ's current guidance is that it will allow the 10-year yield to move flexibly around its 0% target as long as it stays below the 0.25% upper limit, though it will take into account not just the level but the speed of any rise in yields.

The 10-year JGB yield has been creeping up in tandem with a rise in U.S. long-term interest rates, as investors have priced in the prospect of aggressive rate hikes by the Federal Reserve over the course of this year.

BOJ Governor Haruhiko Kuroda has repeatedly said the central bank would maintain interest rates at the current ultra-low levels, given the fragile economic recovery and as inflation remains well below its 2% target.

While the offer drew no bids from financial institutions on Monday, the BOJ's announcement will effectively discourage market players from driving up the 10-year yield above 0.25%, analysts say.

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But some market players doubt how long the BOJ can continue defending the ceiling, as making frequent offers for unlimited buying could weaken the yen further and inflate Japan's already surging import costs.

"Making offers for unlimited bond buying too frequently may cast doubt over the feasibility of yield curve control," said Shotaro Kugo, an economist at Daiwa Institute of Research.

"It may also draw unwanted public attention over the weak yen, so the BOJ probably wants to avoid stepping in too often."

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