February 9, 2017 5:30 am JST
BOJ watch

Japan's central bank surprises with itchy trigger finger

Bond market confused after Kuroda and Co.'s prior shyness on JGB purchases

MASAYUKI YUDA, Nikkei staff writer

BOJ Gov. Haruhiko Kuroda

TOKYO -- An old Japanese proverb says that after burning his mouth on hot soup, a man will blow on a cold salad. This sums up the confusion in the bond market over the Bank of Japan's recent attempts at guiding interest rates.

With the cost of money rising worldwide amid expectations of a surge in U.S. infrastructure spending, the BOJ has already bought Japanese government bonds with over five but no more than 10 years to maturity three times this month. The central bank plans only five to seven such rounds of buying for all of February.

These moves are meant to hold the 10-year JGB yield to "around zero," the BOJ's target for the benchmark long-term interest rate. But the bank and the market still do not seem to be on the same page when it comes to the policy on JGB buying.

"Frankly speaking, this is like beating a dead horse," Kazuhiko Sano, chief bond strategist at Tokai Tokyo Securities, said of the repeated buying in this residual maturity range. The market is more interested in how the BOJ intends to handle rising ultralong interest rates.

The disconnect between investors and the BOJ on the bank's yield curve control policy revealed itself Jan. 25, when it became obvious there would be only five rounds of purchasing that month in the residual maturity range of up to five years. Traders had expected six.

Having shifted the focus of monetary easing in September from the money supply to interest rates, Gov. Haruhiko Kuroda and the rest of the BOJ leadership tried to send the message that JGB purchases would fluctuate from now on. But all banks heard was that buying would never return to earlier levels.

Upward pressure on rates intensified after Donald Trump's U.S. election victory in November, but the BOJ succeeded in keeping the 10-year yield in line with some delicate purchasing adjustments. Minutes of the Jan. 30-31 policy board meeting show that participants felt the market was responding "calmly" to its moves.

Perhaps the bank let down its guard. After Jan. 25, the pressure grew even stronger, taking the 10-year yield as high as 0.150% Friday. The BOJ responded with a round of unlimited JGB buying at a below-market yield -- in other words, a premium price. It ended up buying 723.9 billion yen ($6.47 billion) worth.

The 10-year rate seems to have settled down. But whether it stays placid will depend on the BOJ's communication. The market anticipates a purchase of ultralong JGBs on Friday, in a bigger amount than the previous time. But the BOJ, reluctant to add to its bondholdings needlessly, will assess carefully whether the rise at the far end of the yield curve creates problems for maintaining its 10-year rate target.

Long-term interest rates are higher than at any point since the BOJ introduced its negative interest policy early last year. Ultralong yields are nearing their highs for same period. Against this backdrop, another miscommunication could lead the market to wonder whether the BOJ is serious about its easing commitment.

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