Bank of Japan holds fire as long rates test 0.1%

December 17, 2016 7:20 am JST

Bank of Japan holds fire as long rates test 0.1%

Pressure from Fed hike raises prospect of fight to rein in yields

TOKYO -- The Bank of Japan declined to intervene Friday as 10-year interest rates tested a level seen as the upper limit of the central bank's tolerance, though it may have more chances soon to show its determination to push back.

The bank in September shifted the target of its monetary easing from the money supply to the yield curve. It now aims to keep the yield on benchmark 10-year Japanese government bonds around zero, widely interpreted to mean between 0.1% and minus 0.1%.

But interest rates are rising, partly as the result of the U.S. Federal Reserve's rate hike Wednesday. The bond market here opened Friday with the 10-year JGB yield at 0.1% for the first time since the central bank announced its negative-rate policy Jan. 29.

The yield remained at that level for just 10 minutes or so, and later sank as far as 0.075%. The BOJ seemed to have waited to see how the situation would play out, and apparently concluded that the upward pressure had eased.

The 10-year yield's retreat from 0.1% owed to caution among investors expecting the BOJ to take action against rising rates, an analyst at a European brokerage argued. Potential responses include increasing JGB purchases or conducting a new type of operation in which the central bank offers to buy an unlimited amount of bonds at a fixed yield. The BOJ carried out a previously announced JGB purchase Friday but opted against further moves, such as buying 10-year notes.

Many bond market players contend rates exceeding 0.1% could hardly qualify as "around zero." The market is ready for the possibility of a push back from the BOJ if the 10-year yield breaches the 0.1% line.

A sustained rise in long rates would force the bank to respond with massive bond-buying operations. But increasing JGB purchases would run counter to the point of the new policy approach.

"I think the BOJ could allow long-term yields to go above 0.1% to a certain extent," Naka Matsuzawa of Nomura Securities said. But such tolerance could raise questions about the central bank's monetary policy stance, potentially driving the yen higher against the dollar.

(Nikkei)

http://asia.nikkei.com/Politics-Economy/Policy-Politics/Bank-of-Japan-holds-fire-as-long-rates-test-0.1

Related stories

• When a BOJ 'rate hike' is not monetary tightening
• BOJ Watch: Worker shortage gives cause for concern -- and hope