Bank of Japan reluctant to intervene on rising yields, sources say

[TOKYO] The Bank of Japan (BOJ) sees a limited need for emergency intervention to restrain rising bond yields, a move that runs counter to its effort to roll back stimulus, three sources familiar with its thinking said.

Growing market anticipation of an interest rate hike in December has pushed up the benchmark of the 10-year Japanese government bond (JGB) yield to an 18-year high this week, drawing attention to how the central bank could respond.

BOJ governor Kazuo Ueda, speaking in parliament on Tuesday (Dec 9), said recent increases in bond yields were “somewhat rapid”, and reiterated the central bank’s readiness to respond nimbly in exceptional circumstances.

Policymakers are keeping a watchful eye on market moves but are reluctant to take action presently, such as ramping up bond purchases or conducting emergency market operations, the sources said, citing a high threshold for intervention.

They also see no imminent need to tweak the BOJ’s plan to steadily reduce bond purchases, including for super-long tenors that have recently led to yields rising to record highs, they said.

“It would take a panicky sell-off that is out of sync with fundamentals, something Japan isn’t seeing right now,” said one of the sources, on the high hurdle for the BOJ to ramp up bond buying – a view echoed by two other sources.

Rather, the recent yield rises are due to investors taking a wait-and-see approach on uncertainty over how far the BOJ could eventually raise rates, and how much of the bonds the government will sell to fund the next fiscal year’s budget, they said.

Ueda has signalled that the BOJ will offer some clarity on its future rate-hike path when the board decides to raise rates to 0.75 per cent from 0.5 per cent – a move that markets expect at next week’s policy meeting.

In 2024, the BOJ exited a decade-long, massive stimulus, which included ditching its bond yield curve control and slowing the pace of JGB purchases.

In laying out its taper plan, the BOJ said that while long-term rates should be determined by markets, it will respond “nimbly” if yields rise rapidly in a way out of sync with fundamentals.

Ueda has repeated the language whenever asked about yield moves at press briefings or in parliament, including on Tuesday.

The 10-year JGB yield rose to an 18-year high of 1.97 per cent on Monday, approaching the psychologically important 2 per cent line that has not been breached for nearly two decades.

The BOJ will focus on what is driving the moves rather than specific yield levels, and stay cautious on intervening. Doing so would give a wrong signal to markets that it could discontinue efforts to normalise policy, the sources said.

Intervening would also give markets the impression that the BOJ has a line in the sand on where it would step in, running counter to its attempt to have market forces drive bond price moves, they said.

Yields around the globe have been climbing in recent weeks, as many central banks signalled they are either at or near the end of their own easing cycles, while the BOJ is widely anticipated to hike rates at its policy meeting next week.

JGB yields have also risen on expectations that Prime Minister Sanae Takaichi’s expansionary fiscal policy would lead to a huge issuance of bonds, at a time when the BOJ is reducing its presence in the market. REUTERS