TOKYO • The Bank of Japan (BOJ) yesterday said it would buy an unlimited amount of bonds, as it sought to put a lid on domestic interest rates pushed higher by the broad sell-off in developed market bonds.
Its aggressive bond-buying operation sent most Japanese government bond yields lower and weakened the yen. It also marked a reversal in the recent "slow and stealth" tapering of the bond-buying operation central to its easy monetary policy.
"The BOJ has sent a very strong signal (it is) committed to the yield curve control policy and (it is) not coming to the global tightening party. The reward has been a lower currency," said NAB head of FX strategy Ray Attrill.
The BOJ's announcement followed a spike in 10-year Japanese government bond yields to 0.105 per cent, its highest since early February and significantly higher than the zero per cent it targets for that maturity under its yield curve control policy. The spike was in parallel to the steep rise in German, US and other European bond yields over the past 11/2 weeks, spurred by concerns that global central banks are moving towards reducing stimulus.
It had its origins in a string of hawkish messages from the European Central Bank (ECB), the Bank of England and the Bank of Canada, furthered on Thursday by minutes from the ECB's latest meeting showing it could be open to scrapping its bond-buying pledge. The US Federal Reserve's policy meeting minutes this week suggested it may also soon begin paring back its large bond holdings in the coming months.
To ensure it had a stronger buffer in case increased buying was not enough, the BOJ employed its most powerful weapon - of unconditional buying at specific yield - only for a third time after it started its yield curve control policy in September.
In a special market operation yesterday, the BOJ offered to buy an unlimited amount of 10-year JGBs at a yield of 0.110 per cent. It also boosted the size of its regular auction-based purchase of five- to 10-year maturities to 500 billion yen (S$6.1 billion) from the previous 450 billion yen.
"The BOJ showed its strong determination to keep the 10-year yield around zero per cent and not to let it rise above 0.1 per cent," said Morgan Stanley MUFG Securities strategist Koichi Sugisaki.
Following the BOJ's announcement, the 10-year yield fell to 0.085 per cent while expectations of widening in yield differentials with other countries sent the yen down to 113.835 to the US dollar, its lowest in a month and a half.
But yesterday's increase in bond buying went against the BOJ's attempts in recent months to reduce its massive debt purchases.
Former BOJ board member Sayuri Shirai said the BOJ should steadily proceed with an "implicit tapering" of its bond purchases as any rise in yields would be temporary.