BOJ ramps up battle to defend yield cap even as weakening yen increases economic risk

© . FILE PHOTO: A man in a protective mask walks past the Bank of Japan headquarters amid the coronavirus (COVID-19) outbreak in Tokyo, Japan, May 22, 2020. REUTERS/Kim Kyung-Hoon By Leika Kihara TOKYO ( ) -The Bank of Japan continued its relentless quest to defend a key yield cap by offering to buy unlimited amounts of 10-year Treasury bonds on Tuesday, underscoring its determination to keep policy ultra-easy and avoid downside exert pressure on the yen. The BOJ’s intervention raised the stakes for policymakers in the world’s third-largest economy, as Japan tries to contain the rising cost of imports from a weakening currency and the global fallout from the war in Ukraine. The bond market intervention is in line with an announcement by the BOJ on Monday to buy unlimited bonds Tuesday through Thursday to prevent the 10-year Japanese government bond (JGB) from rising above an implied limit of 0. 25% who put it around its 0. % target. The BOJ made two offers on Tuesday after the morning’s first failed to push interest rates much lower. Combined, the offers yielded bids worth 528.6 billion yen ($4.28 billion). The 10-year JGB rate stood at 0.245% on Tuesday and stayed close to the BOJ’s implied 0.25% limit, despite central bank intervention. Some analysts questioned the central bank’s ability to continue its bond-buying campaign for an extended period of time. “Theoretically, the BOJ can protect the 25 basis point cap through unlimited fixed-rate transactions. But at the same time, I don’t think this situation is sustainable,” said Kentaro Koyama, chief economist at Deutsche Bank (DE:) in Tokyo. “In the short term, the BOJ can keep buying indefinitely. But if the BOJ continues to be challenged by the market, I think this could be the trigger to adjust their yield curve control.” Struggling to swim against the tide of rising interest rates worldwide, the BOJ vigorously defended its 0.25% interest rate ceiling on Monday with a rare move by offering to buy an unlimited amount of 10-year JGBs at 0. 25%. The central bank then announced its plan for successive interventions that will last through Thursday. Aside from the offer to buy an unlimited number of 10-year JGBs at 0.25%, the BOJ may also make unscheduled purchases for super-long bonds if yields rise before maturity peak, analysts say. “With regard to JGB outright purchases…the BOJ may change the schedule and amounts of purchases as necessary, taking into account market conditions,” the BOJ said in Monday’s statement detailing its plan for fixed-line transactions. announced interest. The yield curve steepened on the long side, underscoring selling pressure among JGBs. Yields for 20-, 30- and 40-year bonds all rose to their highest levels since 2016. Under the control of the yield curve, the BOJ puts short-term yields at -0.1% and 10-year JGB yields at around 0% . YEN CHALLENGE The BOJ’s aggressive efforts to curb yields pushed the yen to a six-year low against the dollar, which could add to the tensions facing households and retailers amid already rising costs of imports of raw materials. In sign of the government’s growing alarm over the fall of the yen, Japan’s top currency diplomat said Tokyo has discussed dollar and yen movements with Washington, and the two sides have agreed to communicate closely on currencies. The yen’s decline is unlikely to stop the BOJ from defending its yield cap, said Toru Suehiro, senior economist at Daiwa Securities. “The BOJ’s message to avoid rate hikes is very strong, without considering the effect of the weak yen that its action could trigger,” said Suehiro. Deputy Chief of Cabinet Seiji Kihara, one of Prime Minister Fumio Kishida’s closest associates, said on Sunday that the BOJ must maintain its huge stimulus as it is difficult to tackle cost inflation with policy tightening. In a sign that fiscal policy will play a bigger role in cushioning the blow from rising raw material costs, Kishida instructed his cabinet on Tuesday to put together a new aid package. ($1 = 123,4400 yen)

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