Bank of Japan Takes Action as 10-Year JGB Yield Reaches Highest Level in a Decade

20 Oct, 2023

Bank of Japan Takes Action as 10-Year JGB Yield Reaches Highest Level in a Decade

TOKYO: The Bank of Japan (BOJ) took action in the Japanese government bond (JGB) market for the fifth time this month as the 10-year yield hit a fresh decade high. This move placed the BOJ in a battle against market forces amid the surge in U.S. yields.

At the start of the trading day, the benchmark JGB yield reached 0.845%, its highest level since July 2013, following similar peaks in the previous day. However, it promptly eased after the BOJ's announcement and ended 1.0 basis point (bp) lower than the previous day's closing level, settling at 0.83%.

Under its yield curve control (YCC) policy, the BOJ caps the 10-year yield at 1%, a limit it doubled in a surprise move in late July. While the central bank does not intend to cap the yield, its interventions signal a preference for gradual, rather than rapid, movements.

"The BOJ's intention is not to set a ceiling on the yield. It aims to convey a preference for gradual rather than rapid movements," observed Masayuki Kichikawa, Chief Macro Strategist at Sumitomo Mitsui DS Asset Management. The BOJ's comfort with the present level is unclear, yet at 0.845%, it stands notably lower than the 1% threshold, leaving room for potential growth.

Recent weeks have witnessed increased BOJ intervention as Japanese rates have been influenced by rising U.S. yields. On Friday, the 10-year U.S. Treasury briefly exceeded the psychological 5% threshold for the first time in over 16 years.

In its latest operation, the BOJ offered five-year loans against collateral to financial institutions, using this tool for the second time this month. Additionally, the central bank has made additional bond purchases three times this month, including an earlier move this week.

The BOJ's bond market intervention presents a delicate challenge, as it could affect the yen's exchange rate. Should the yen weaken beyond 150 per dollar, it may become a point of concern for currency intervention.

Yielding interest rate differentials have driven the yen down by as much as 7.1% against the dollar since the BOJ's policy announcement on July 28. The promise of greater flexibility in the YCC's execution was overshadowed by the relentless climb of U.S. yields.

However, the exchange rate has stabilized below the 150 mark since a brief breach earlier in the month, followed by a swift pullback. While some had speculated about authorities intervening in the currency market, official data suggests this was not the case.

The yen's depreciation has political implications, raising costs for imported energy and food, particularly at a time when Prime Minister Fumio Kishida may consider calling a snap election.

"If the yen surpasses the 150 level, the BOJ may encounter increased difficulty in its JGB market interventions. However, with the yen maintaining stability, the central bank can actively manage long-term interest rates while carefully monitoring the response in the foreign exchange market," Kichikawa elaborated.This highlights the complex balancing challenge that the BOJ faces.