Zhitong Finance APP learned that the Bank of Japan announced the third day of unplanned bond purchase operations in response to the sell-off of short-sellers and outside speculation that it is about to end its ultra-loose monetary policy. The Bank of Japan proposed to purchase unlimited two-year government bonds at a yield of 0.04% and five-year government bonds at a yield of 0.24%. The central bank also proposed to purchase a total of 700 billion yen (about 5.3 billion U.S. dollars) 1-10-year treasury bonds, and 300 billion yen 10-25-year treasury bonds. In addition, the Bank of Japan also buys unlimited 10-year government bonds and futures linked securities at a yield of 0.5% every day. The Bank of Japan on Wednesday formally announced unscheduled bond-buying operations to help stem a rise in the country's benchmark bond yields.
With domestic investors holding about $2.4 trillion in foreign debt, the BOJ's efforts to stem rising yields in the country could have global ramifications. Rising JGB yields, which are currently high, could spur Japanese investors to bring more money home, exacerbating upward pressure on global government bond yields.
Swaps Traders expect Japanese 10-year yields to rise further
Commonwealth Bank of Australia head of fixed income and FX strategy Martin Whetton wrote in a research note: "The ripple effect of the Bank of Japan's move continues to affect the market " hedging costs remain punitive. Yen is likely to fall back, which would cost unhedged buyers dearly, while domestic yields in Japan are certainly attractive."
After the BoJ announced its latest operation , The 10-year Japanese bond increased or , and the yield fell 4.5 basis points to 0.41%. The yen was up 0.4% against the dollar, although the move to cap bond yields remained generally negative for the yen.
The Bank of Japan this week conducted unlimited and fixed-amount purchases of government bonds with a maturity of 10 years or less, and said on Thursday that it will provide two-year interest-free loans to banks next week. This follows the Bank of Japan's doubling of the 10-year yield peg earlier this month to 0.5% to help improve market functioning.
After Friday's statement, the Bank of Japan's bond purchases will increase to about 18 trillion yen this month, surpassing the previous record set in June.
The Bank of Japan is buying bonds at a record pace
Tokyo Aoyama Gakuin University professor and former Finance Minister Hideki Kamihara said in an interview with the media that the Bank of Japan may surprise the market by tightening monetary policy again as early as next month.
The Bank of Japan's decision to raise the cap on 10-year government bond yields was aimed at improving market function, but the move triggered a sell-off in bonds, requiring the Bank of Japan to buy more bonds and potentially further reducing liquidity in the bond market.
Core inflation in Japan is now climbing at the fastest pace in 40 years, putting further pressure on policymakers.
"To be honest, I don't understand the BOJ's intentions," Kazuhiko Sano, chief bond strategist at Tokai Securities with 30 years of experience in the bond market, wrote in a note. "Expanding the trading range will only incite more speculation and expectations about monetary policy changes, and increasing bond purchases may further reduce market liquidity." One is a fixed amount. In the former, it buys an unlimited amount of bonds at a predetermined yield. In the latter, it buys a fixed amount of bonds at prevailing market mechanism yields.
