TOKYO (AFP) - The Bank of Japan unleashed a torrent of liquidity on Thursday to quell government bond yields amid concern that higher long-term interest rates could squeeze mortgage payers and crimp spending.
The central bank announced a two trillion yen (S$25 billion) fund-supplying operation after the yield on the benchmark 10-year Japanese government bond hit 1.0 per cent, its highest level in over a year.
The BoJ is active in supplying finance to banks and other potential buyers in the bond markets every day, but the scale of Thursday's operation was large by recent standards.
The bank's financial operations division said in a statement the operation to provide fixed-rate short-term loans to financial institutions was to respond to "the unreasonable increase in the volatility of long-term rates".
Yields on the benchmark 10-year government bond sank to a record low of 0.315 per cent on April 5, a day after the BoJ introduced its current easing programme that includes bond purchases to enhance liquidity and beat deflation.
But confusion over the ultimate effects of the BoJ scooping up the equivalent of as much as 70 per cent of newly issued bonds from the market quickly set the yields on an upward march.
Investors started selling due to uncertainty over how yields would move when the central bank's share was so high. Some also dumped bonds to raise funds to invest in a stock market that has shot up in recent months.
The price of bonds moves in the opposite direction from their yield. A larger supply of bonds pushes down the price and therefore increases the yield.
Yields on 10-year government bonds are benchmarks used to set the rates of mortgages and other long-term loans, so any rise hits repayments for homeowners and reduces their ability to spend on other consumer goods.
Japan desperately needs its consumers to buy more things if it is to overcome the years of deflation that have battered its stagnating economy.
Chief government spokesman Yoshihide Suga said the BoJ move was in line with expectations and was no cause for alarm.
"It is natural for us to see interest rates rise as share prices rise like this," he told reporters.
"The Bank of Japan is creating the place to exchange views so that moves in interest rates can be stabilised firmly. Therefore, we are confident that things will be handled appropriately."
Thursday's spike also came after Federal Reserve chief Ben Bernanke suggested the US central bank could scale back its aggressive stimulus programme soon, sparking bond selling there.
Fund managers and dealers said the market had sold off on disappointment that the central bank offered no solutions or firm statements on recent yield rises and market turbulence at the end of its two-day policy meeting on Wednesday.