BOJ Scraps Yield Floor to Bolster Bond-Buying Operations

The Bank of Japan scrapped its 0.1 percent yield floor for its purchases of government bonds as it sought to bolster flagging demand in its funding operations.

The central bank removed the limit on purchases of securities with maturities of one year or less in its so-called rinban operation, or outright buying of Japan’s debt, BOJ spokesman Tsuyoshi Nakamura confirmed today. The change was implemented at the BOJ’s meeting on July 12 and communicated to banks and securities companies while not included in its policy decision release. Scrapping the yield floor means the BOJ can now buy debt at negative yields.

The revision is intended to attract enough sell offers when the BOJ conducts funding operations and highlights the central bank’s difficulty in executing its existing stimulus efforts. It failed to attract enough bids in its rinban purchases on July 6 for a second time since May, as banks chose to hang on to the bonds rather than take cash. A six-month funding operation also didn’t reach its bid goal for a 14th straight time on July 10.

“There is a high chance that the BOJ will scrap the floor rate for bonds with a remaining maturity of more than a year,” according to a report today by Naka Matsuzawa, chief strategist at Nomura Securities Co. Such an extension would “depend on whether their yields remain 0.1 percent and BOJ operations continue to fail to reach targets.”

The BOJ on July 12 bolstered its asset purchase fund by 5 trillion yen ($63 billion) to 45 trillion yen while cutting the size of credit-loan facility by the same amount. It left its overnight rate target between zero and 0.1 percent, the level it has been since October 2010.

EFSF Auction

Yields on Japan’s benchmark 10-year and 5-year government securities last week reached the lowest since 2003 amid bond-purchase operations by the central bank and as investors sought a haven from the global economic slowdown.

The European Financial Stability Facility, the region’s temporary rescue fund, yesterday auctioned 1.49 billion euros ($1.8 billion) of six-month bills at a yield of minus 0.0113 percent. The EFSF joined Belgium, Denmark, France, Germany, the Netherlands and Switzerland in being able to attract investors to pay for the safety of holding their debt.

Borrowing costs of Europe’s higher-rated nations have plunged since the European Central Bank cut its benchmark interest rate to 0.75 percent and lowered its deposit rate to zero on July 5.

Japan’s 10-year yield slid half a basis point to 0.765 percent as of 1:52 p.m. in Tokyo, according to Japan Bond Trading Co., the nation’s largest interdealer debt broker. It reached 0.755 on July 13, the least since June 2003 when the all-time low of 0.43 percent was set.

The five-year rate was at 0.185 percent today from as low as 0.175 last week. Twenty-year yields slid to as low as 1.555 percent least since August 2010.

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