Following the US, Will Japan Tighten? Japan Draws a Line Through Government Bond Purchases

[Image source=Reuters Yonhap News]

[Asia Economy Reporter Jeong Hyunjin] As U.S. Treasury yields continue to rise amid U.S. inflation, the Bank of Japan (BOJ) has drawn a line against views that it will shift to tightening by purchasing government bonds to reduce the impact on its own country.

According to the Nihon Keizai Shimbun on the 11th, the BOJ announced that if long-term interest rates rise when the three-day holiday ends on the 14th, it plans to conduct temporary government bond purchases. The target is Japan's 10-year government bonds, which will be purchased in unlimited amounts at a 0.25% yield. This is the first time since July 2018 that the BOJ has engaged in such open market operations.

The reason the BOJ is purchasing government bonds is that the 10-year government bond yields in the Japanese bond market are on the rise. On the previous day, the 10-year Japanese government bond yield reached 0.23% intraday, the highest level in six years since the introduction of the negative interest rate policy in January 2016. The BOJ had maintained a ±0.25% cap on government bond yields, but as the 10-year bond yield approached this limit, the need to take measures to curb the rise in yields increased.

The Nihon Keizai explained, "Since private investors such as banks lose the advantage of selling to other investors at yields higher than 0.25% (cheaper prices), the financial market yield of 0.25% is effectively the ceiling," adding, "It acts as a protective wall to prevent long-term yields from rising above 0.25%."

There also appears to be an intention to quell market turmoil caused by rising long-term yields and to counter expectations that the BOJ will reduce monetary easing. Since 2013, the BOJ has managed short- and long-term interest rate targets separately to lower long-term yields. Since 2016, it has guided short-term rates at 0.1% and long-term rates (10-year government bonds) at 0%.

The Nihon Keizai stated, "With the U.S. Federal Reserve (Fed) expected to raise rates more than three times this year, market expectations that the BOJ will soon reduce monetary easing have grown," adding, "Allowing this could cause turmoil such as stock price declines, so the BOJ notified this before the holiday to suppress turmoil in the bond market early next week."

This content was produced with the assistance of AI translation services.