The Bank of Japan intensified its efforts to stop benchmark yields from falling to record lows by cutting bond purchases on Friday and then paving the way to reduce them further in the coming month.
The central bank followed up on a ¥50bn ($470mn) reduction in purchases of five-to-10 year debt this morning with a move to lower the buying range for this key maturity zone at its operations in September.
Speculation the BoJ would step in to halt the slide in yields was running high as the global debt rally caused the 10-year yield to drop further out of the central bank’s target range. Having come within one basis point of an all-time low of minus 0.3% on Thursday, the yield rose following BoJ’s actions on Friday, with that on similar-maturity US Treasuries also moving higher.
“The BoJ showed its stance by tapping the brakes when yields are falling,” said Naomi Muguruma, a senior market economist at Mitsubishi UFJ Morgan Stanley Securities in Tokyo. “The reduction shows the BoJ isn’t totally ignoring the situation and just allowing markets to push yields lower.”
The BoJ is up against waning inflation at home and a slowing global economy that’s weighing on yields worldwide. It will continue to face pressure from the international bond rally given ongoing US-China trade tensions, concerns about Brexit and the turmoil in Argentina and Hong Kong.
The central bank offered to buy ¥400bn of five-to-10 year securities at Friday’s regular operation – down from ¥450bn previously – marking the biggest cut to its purchases in the tenor since starting yield-curve control in 2016.
The bond-buying plan for September released later in the day showed it intends to buy between ¥250bn and ¥550bn of these notes at each operation next month. That’s versus a band of ¥300bn to ¥650bn for August.
Japan’s 10-year yield was up 1 basis point for the day at minus 0.28%, after rising to as high as minus 0.265% in immediate response to the operation. The BoJ in July 2018 said it would target a range of about 20 basis points above or below zero per cent for the yield.
The yen rose 0.1% to 106.43 per dollar.
Friday’s twin steps come as the sustained rally in global debt markets saw yields in Japan continue to decline even after the BoJ cut purchases of five-to-10 year bonds on August 16, which was the first reduction in the zone since December.
Traders in Tokyo had been debating over what actions the BoJ could take, with tapering bond purchases considered to be the easiest option for the central bank.
Speculation over widening the yield band has also been rife among market watchers, while some others have indicated the possibility of the BoJ putting a limit on the yield investors can offer at its buying operations, effectively setting a floor on rates.
The BoJ’s policy meeting on September 18-19 is widely expected to provide more insight into its thinking.
For now, the central bank’s action Friday should make “investors wary of the minus 0.3% level,” said Naoya Oshikubo, a senior economist at Sumitomo Mitsui Trust Asset Management Co. The ¥50bn cut was “aggressive” and will be “effective in slowing the pace of the yield drop,” he said.