Photographer: Akio Kon/Bloomberg

Here's Where the BOJ May Next Send a Signal on Japan Bond Yields

  • Investors face ’non-trivial’ risk of yen surge: Evercore ISI
  • BOJ typically holds two bond-purchase operations a week

Investors were put on notice this week that they may need to pay closer attention to the Bank of Japan this year.

Compared with the Federal Reserve and European Central Bank, the BOJ has offered only limited so-called forward guidance to investors on its policy outlook for the next year or two. That’s given traders rein to speculate on potential shifts, picking up on perceived signals such as Tuesday’s reduction in bond purchases at a regular BOJ operation.

Scroll below to see a list of upcoming events that could prove as further triggers for market moves.

It’s simpler to monitor the Fed or ECB, which have easy-to-understand quantities set for their monthly bond operations. In the BOJ’s case, it has a zero percent target for 10-year government note yields -- but effectively no set target for other maturities. And Governor Haruhiko Kuroda and his colleagues haven’t specified what they might do with yield-curve targets as inflation picks up.

So when the BOJ trimmed its purchases of bonds maturing in more than 10 years Tuesday, some traders took it as a sign policy makers favor higher ultra-long yields -- all the more so after Kuroda in November highlighted a theory that extremely low interest rates can damage the banking industry.

Little Guidance

"The BOJ has been unable or unwilling to provide adequate forward guidance that would render speculation about these operational signals redundant," Krishna Guha, vice chairman at Evercore ISI in Washington, wrote in a note. Investors "have to put non-trivial weight on the risk of an outsized upside move in the yen this year" given the potential -- even if small -- of the BOJ boosting yields before 2 percent inflation is at hand, he wrote.

Officially, the BOJ says it will keep expanding its balance sheet until the 2 percent inflation target is surpassed. On policy rates, it simply says adjustments will be made "as appropriate" with a view to keeping up the momentum toward the price target.

Here’s a list of some BOJ events this month that could prove triggers for further speculation on the policy outlook.

Jan. 1110:10 a.m. BOJ bond-buying operation: 1~10 year maturities
Jan. 1510:10 a.m.BOJ bond-buying operation: maturities of more than 5 years
Jan. 15Kuroda speaks at BOJ branch manager meeting
Jan. 1710:10 a.m.BOJ bond-buying operation: 1~5 year maturities
Jan. 1910:10 a.m. BOJ bond-buying operation: maturities of more than 5 years
Jan. 23Late a.m. to early p.m.BOJ policy decision released, along with quarterly economic outlook report
Jan. 2410:10 a.m.BOJ bond-buying operation: 1~10 year maturities
Jan. 2610:10 a.m.BOJ bond-buying operation: 1~5 year maturities, and more than 10 years
Jan. 2910:10 a.m.BOJ bond-buying operation: 5~10 year maturities
Jan. 31Deputy Governor Kikuo Iwata speech and briefing with reporters 
Jan. 31 5 p.m.Bond-purchase plan for coming month released
Late JanuaryPotential appearances from BOJ officials at parliament.

Further signs on where the BOJ may be headed could come from crucial personnel appointments. Both deputy governors’ terms are due March 19, while Kuroda’s is up April 8. Any sign that Prime Minister Shinzo Abe will appoint officials concerned about excessively low yields -- which have hurt the nation’s regional banks -- could intensify speculation of fine tuning bond yields higher.

"We view the risk window as late second-quarter, early third-quarter" for a boost in the yield-curve target, Guha wrote, emphasizing that his base case is for no change. That period would be "in the early phase of the next term for the BOJ governor" and after banks have reported fiscal-year results.

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