BOJ Still Ready to Defend Yield Range Before Review

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BOJ Still Ready to Defend Yield Range Before Review

Toru Fujioka and Sumio Ito
·2 min read

(Bloomberg) -- Bank of Japan officials are still prepared to stem any risk of Japan’s benchmark bond yield rising too much ahead of a policy review later this month and could even act before it hits 0.2%, according to people familiar with the matter.

The central bank has no pre-set yield level in mind for entering the market as it depends on the speed of gains, the level, the main reasons behind increases and the state of global financial markets, among other factors, they said.

The absence of BOJ action when the yield touched a five-year high of 0.175% on Friday left some market participants wondering if the bank has decided to sit tight until the results of the review expected on March 19.

Read More: BOJ Mulls Three Pressure Points to Keep Stimulus Running Longer

The BOJ has a loose movement range of around 0.2 percentage point either side of its zero target for the yield. While the current ceiling is intentionally vague, the bank wouldn’t allow the yield to hit 0.3% ahead of the review as that would raise doubts over the credibility of yield curve control, they said.

Some investors and economists see the bank widening the movement range around the zero target at the review as the BOJ tries to shore up its policy framework for the longer run. Others say recent jumps in yields have made it harder to do widen the range because the bank doesn’t want to give the impression there’s a green light for higher yields.

While some bond fluctuations reflecting the recent global market shift in economic outlook are acceptable, the bank must keep the entire yield curve low and stable amid the pandemic, the people said.

Central Banks Fight Bond Rout With Action and Promise of More

The remarks follow recent gains in global yields that have pushed up borrowing costs for governments toward the end of last week. The gains present a particular problem for central banks such as the BOJ and the Reserve Bank of Australia that target yield levels.

The RBA defended its three-year yield on Friday and doubled down on bond purchases Monday, spurring the biggest drop in yields in a year.

The BOJ can limit yield gains by buying more bonds in scheduled or unscheduled operations. Offering to buy an unlimited amount of bonds at a fixed-rate above the market level is one of its most powerful tools.

“Unlike the Fed, it’s hard for the BOJ to sit tight in the face of a yield rise,” Yoshimasa Maruyama, chief market economist at SMBC Nikko Securities, wrote in a report Monday. “The BOJ could be tested by the market again on its stance to keep the yield low.”

(Adds economist’s comments.)

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