Japan 10-Year Yield Seen Nearing Level Too Low for BOJ Comfort

  • Central bank may pare buying to support yields, Muguruma says
  • Volatility gauge drops to lowest level since January

Japan’s benchmark government bond yields are approaching levels that could convince the Bank of Japan to slow its debt purchases, according to Mitsubishi UFJ Morgan Stanley Securities Co.

Ten-year yields, which were at minus 0.09 percent as of 3:30 p.m. in Tokyo, have dropped since turning positive for the first time since March on Sept. 21, the day the BOJ said it would like to keep yields near zero. Should they plunge, the central bank may first seek to stem the slide by reducing purchases, before setting a floor on the yield at which it’s prepared to buy debt, said Naomi Muguruma, a senior market economist at Mitsubishi UFJ Morgan Stanley Securities in Tokyo.

“It’s possible that the BOJ may reduce buying the 10-year sector when the yield falls beyond minus 0.1 percent, or even skip buying,” Muguruma said. “The reduction will only be very gradual. I don’t expect any major change in the amount or frequency next month.” 

Yield Control

The BOJ announced last week that it would adjust the volume of its asset purchases as necessary in the short term to control bond yields, while keeping it at about 80 trillion yen ($796 billion) annually over the long term. The central bank, which has had a target to buy 8 trillion yen to 12 trillion yen in government bonds from the market each month, will release an outline of its buying plan for October at 5 p.m. on Friday.

A gauge that measures how much traders expect Japanese bonds to fluctuate held near an eight-month low. The S&P/JPX JGB VIX, a measure of implied volatility for 10-year Japanese government bond futures, was at 1.96 percent Tuesday after dropping by 1.7 percentage points last week to the lowest level since January.

“The BOJ probably wants to damp speculation that the new measure may mean tapering, so I expect more or less the same amount of bond purchases for now,” said Naoya Oshikubo, a rates strategist at Barclays Plc in Tokyo. “In the near term, the BOJ may struggle to control yields, but over time, yields are likely to be contained in a range.”

For a QuickTake Q&A on why the BOJ is targeting the yield curve, click here.

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

Ten-year yields will probably range between minus 0.1 percent and zero, according to Mitsubishi UFJ Morgan Stanley’s Muguruma, Barclays’ Oshikubo and Kiyoshi Iida, a senior market economist at Totan Research Co. in Tokyo. For longer-dated bonds, the focus would be whether the BOJ allows a 10 or 20 basis point range from where they were on Sept. 20, the day the central bank started its two-day policy meeting, Oshikubo said.

The BOJ now has more flexibility to adjust its bond purchases when it deems longer-dated yields have risen too much, according to Totan’s Iida. While outright JGB buying operations can’t be conducted on the day of debt auctions, the BOJ can use fund-supplying operations to respond to a surge in yields, he said.

“The BOJ is equipped with two cards to deal with a spike in JGB yields,” Iida said. “These two tools are powerful in controlling 10-year yields, as the BOJ can buy an unlimited amount under the fixed-rate operations.”

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