Japan’s 10-Year Bonds Tumble After BOJ Targets Yield Near Zero

Updated on
  • Central bank introduces fixed-rate bond-buying operations
  • Benchmark yield turns positive for first time in six months

Japan’s 10-year government bond yields turned positive for the first time since March after the central bank said it would purchase debt so that yields remain near zero.

The benchmark 10-year yield rose to as high as 0.005 percent and was minus 0.035 percent at 9:06 a.m. in London, from minus 0.065 percent Tuesday, according to Japan Bond Trading Co. It has climbed from the record low of minus 0.3 percent set in July. Thirty-year yields increased two basis points to 0.515 percent.

The Bank of Japan also said Wednesday it would move away from a rigid target for expanding the money supply, while seeking to control yields across different maturities. The central bank said its target for expanding the monetary base through asset purchases, previously at 80 trillion yen ($780 billion) annually, may fluctuate in the short term to enable policy makers to focus on yields and it can extend the negative rate if needed.

“The BOJ has gone two, three steps ahead of expectations in clarifying its shift from quantity to interest rates,” Mari Iwashita, chief market economist in Tokyo at SMBC Friend Securities Co. “It’s showing the BOJ’s desire to control the yield curve to reduce the side effects stemming from the negative rate policy.”

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Along with its regular monthly debt purchases from the market, the BOJ will conduct fixed-rate purchase operations focused mainly on the most recently issued coupon-bearing debt with maturities ranging from two to 40 years, the central bank said in a statement. The yield and frequency of the additional operations will be determined by the BOJ, which will also set the size of purchases at either a fixed or unlimited amount.

Long-term bonds are the place to be because they offer higher yields than shorter maturities, said Tsutomu Komiya, a debt investor in Tokyo at Daiwa Asset Management, which oversees about $131 billion in assets. What’s more, the central bank is now pledging to control yields, limiting the danger that they will rise, he said. “They want to fix the yield curve at the current level,” Komiya said.

Thirty-year bonds yield 53 basis points more than their 10-year counterparts, with the spread widening from 26 basis points in June.

“The market operations are aimed at containing a sharp rise in yields, while putting a floor to the 10-year sector around zero,” said Naomi Muguruma, a Tokyo-based senior market economist at Mitsubishi UFJ Morgan Stanley Securities Co. in Tokyo. “That will likely keep some scope for maturities with positive yields to meet demand from investors wanting positive yields.”

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