Bank of Japan intervenes as 10-year JGB yield hits fresh decade peak

Japanese national flag is hoisted atop the headquarters of Bank of Japan in Tokyo, Japan Sept 20, 2023. REUTERS/Issei Kato/File photo

TOKYO  – The Bank of Japan intervened in the Japanese government bond (JGB) market on Friday for the fifth time this month after the 10-year yield pushed to a fresh decade high, pitting the BOJ in a fight against market forces amid surging U.S. yields.

The benchmark JGB yield climbed to 0.845 percent right at the start of the trading day, its highest since July 2013, after revisiting peaks the previous day as well.

But it eased immediately after the BOJ announcement, and was last 1.0 basis point (bp) lower than Thursday’s closing level at 0.83 percent.

The BOJ caps the 10-year yield at 1 percent under its yield curve control (YCC) policy, after doubling it in a surprise move at the end of July. However the central bank has shown it will not tolerate sharp moves toward the ceiling, stepping in several times to curb the pace of increases.

“The BOJ is not trying to cap the yield here. It’s sending a signal that moves should be gradual, not rapid,” said Masayuki Kichikawa, chief macro strategist at Sumitomo Mitsui DS Asset Management.

“I don’t know if the BOJ is feeling comfortable or not (with the level), but 0.845 percent is still well below 1 percent . There is room for it to rise.”

Policymakers have stepped up intervention in recent weeks, with Japanese rates succumbing to the gravitational pull of U.S. yields. The 10-year Treasury briefly breached the psychological 5 percent mark on Friday for the first time in more than 16 years.

The BOJ offered to supply five-year loans against collateral to financial institutions in its latest operation, deploying the tool for the second time this month. Its other conventional option is to make additional bond purchases, which it has conducted three times this month, including earlier this week.

Japan’s central bank is walking a tightrope with bond market intervention, which risks tipping the yen to the weaker side of 150 per dollar, a level that many see as a red line for currency intervention.

Yen vs dollar

Yawning interest rate differentials have driven a slump as deep as 7.1 percent in the yen against the dollar since the BOJ’s July 28 policy announcement, as the promise of more flexibility in the conduct of YCC was overwhelmed by the relentless climb of U.S. yields.

However the exchange rate has stabilized below 150 since briefly topping that level at the start of the month, only to violently pull back. Some had speculated that authorities had intervened in the currency market, but official data suggests that was not the case.

The weak yen is a political flashpoint, driving up imported energy and food prices at a time when Prime Minister Fumio Kishida may be mulling a snap election.

“If the yen crosses 150, it would of course be more difficult for the BOJ to intervene in the JGB market. But because the yen is stable, the BOJ is able to try and rein in long-term interest rates, and watch the reaction in the foreign-exchange market also,” said Kichikawa.

“That’s the kind of delicate balancing act facing the BOJ.”