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Bank of Japan keeps up yield defence

TOKYO (CNA) – Japan’s central bank offered to buy unlimited amounts of 10-year government bonds for the fourth straight day yesterday as part of its aggressive efforts to defend its yield curve against the global tide of higher interest rates.

The Bank of Japan (BOJ) said on Monday that it would be repeating the offer for unlimited purchases every day until March 31, the final day of the first quarter.

Investors are now focussed on whether the BOJ could increase the frequency and volume of bond purchases under a second-quarter market operation schedule, due to be released later on. After falling to as low as 0.210 per cent on Wednesday due to the BOJ’s massive intervention, the yield on the benchmark 10-year Japanese government bond (JGB) yield crept up to 0.225 per cent yesterday.

The level was still below the 0.25-per-cent implicit cap the BOJ sets around its zero per cent target.

“The BOJ may increase bond buying somewhat in the second quarter, so markets make take a breather after testing the 0.25-per-cent cap,” said Head of Japan rates strategy at SMBC Nikko Securities Chotaro Morita.

A man walks past the Bank of Japan headquarters in Tokyo. PHOTO: CNA

While other major central banks have responded to mounting inflationary pressures by putting interest rates on an upward path, the super dovish BOJ is struggling to keep its yield curve control settings unchanged.

The yen has lost around eight per cent against the dollar this month due in large part to the widening interest rate differential.

The yen’s depreciation has exacerbated the rising cost of fuel and raw material imports due to the war in Ukraine.

Vice Finance Minister for International Affairs and Japan’s top currency diplomat Masato Kanda on Tuesday escalated his warning against sharp yen falls, saying Tokyo and Washington were closely communicating on currency issues.

Currency traders are on guard for any verbal signal that intervention to support the yen was imminent, usually delivered by policymakers cautioning against “one-sided” moves or stressing their resolve to take “decisive action”.