Japan gov’t bond breaches yield cap, BOJ steps in with buying, loans

TOKYO  -Japan’s 10-year government bond yield on Wednesday breached the top end of the Bank of Japan’s policy band for a second straight session, prompting the central bank to step into the market with emergency bond buying and offering of loans.

Investors have renewed their attack on the BOJ’s ultra-loose interest rate stance, expecting the central bank to abolish its yield curve control (YCC) policy after incoming governor Kazuo Ueda takes the helm in April.

Ueda will testify before Japan’s lower house on Friday.

The yield on 10-year JGBs climbed to 0.505 percent on Wednesday, breaking through the central bank’s 0.5 percent cap and marking its highest level since Jan. 18. It last traded at 0.5 percent.

The BOJ bought 300 billion yen ($2.2 billion) of Japanese government bonds with maturities of five to 10 years and 100 billion yen of bonds with maturities of 10 to 25 years.

Masayuki Koguchi, general manager of Mitsubishi UFJ Kokusai Asset Management’s fixed income division, said he expects the BOJ to conduct emergency operations when yields rise at least until the next policy meeting in March.

“But it is questionable whether that is effective,” he added.

In its struggle to contain elevated yields, the BOJ bought a record 23.69 trillion yen ($175.69 billion) worth of government bonds in January.

Foreign investors have been particularly active in attacks on the BOJ’s policy. They sold a monthly record of more than 4 trillion yen in JGBs in January, data from the Japan Securities Dealers Association showed.

In order to deter speculation, the BOJ last week quadrupled the minimum fee charged to financial institutions for borrowing some 10-year Japanese government bond notes, effective from Feb. 27.

The five-year JGB yield rose to high as 0.245 percent on Wednesday, its highest since Jan. 18, before easing to 0.240% after the BOJ announced it would provide 5-year loans against collateral to financial institutions.

The loan operation is aimed at encouraging investors to buy 5-year bonds and to lower interest rate swaps in the same maturity that move along with the 5-year JGB yield.

This would be the fourth time that BOJ provides such loans since last month after amending rules for its funds-supply operation.

($1 = 134.6800 yen)