TOKYO -- Japanese long-term bond yields ended Wednesday at their highest level in a year and a half as investors test the limit of the Bank of Japan's new found tolerance for rising long-term rates.
The central bank decided Tuesday to let long rates move in a wider band than the previous effective limit at 0.1% above or below its target of around zero. Gov. Haruhiko Kuroda said he sees the range doubling, which market players understand to mean that rates can rise as high as 0.2%.
But the central bank also stated that it will purchase Japanese government bonds "promptly and appropriately" if yields spike. This has raised the question of at which point it will use fixed-rate operations -- offers to buy an unlimited quantity of bonds at a given yield -- to tamp down such a surge.
The yield on benchmark newly issued 10-year JGBs started the day at 0.07%, up 1 basis point from Tuesday's close. "Selling ensued to test the BOJ's stance," said Takafumi Yamawaki of J.P. Morgan Securities Japan.
The rise in yields picked up steam around 2 p.m. as the central bank, which had intervened twice last week at lower rate levels, declined to act even after yields topped 0.11%. The 10-year yield ended the day at 0.12%, the highest since February of last year.
JGB futures prices plunged Wednesday as well, triggering an emergency margin call that afternoon by Japan Securities Clearing -- its first such measure since markets crashed in August 2016.
Soft demand at Thursday's Finance Ministry auction of 10-year JGBs could drive yields even higher. Tomohisa Fujiki of Citigroup Global Markets Japan expects the BOJ to conduct fixed-rate operations again if long-term rates hit 0.15%, which would mark their highest point since September 2016, when the central bank introduced its yield curve control policy.
But few expect rates to soar to 0.2% all at once. The tight supply-demand balance created by the BOJ's past bond-buying "won't change quickly," said Shuichi Ohsaki of Merrill Lynch Securities Japan.
And if yields climb further, "investors will buy" as prices fall to attractive levels, Fujiki said.