Japanese Government Bond Yields Surge on Speculation of Changes to Bank of Japan’s Policy
Japanese government bond yields experienced a sharp surge on Friday, reaching the upper end of the Bank of Japan’s (BOJ) control range, amidst market rumors of potential modifications to the central bank’s ultra-dovish stance. The 10-year Japanese government bond yields witnessed a 13.5% jump to 0.50%, testing the upper limit of the BOJ’s yield curve control (YCC) range for the first time in four months.
The speculation was triggered by a report in Nikkei, suggesting that the BOJ may consider altering its YCC policy in a meeting later on Friday. One of the factors impelling this speculation is the persistent high inflation rates that have exceeded the BOJ’s target range in recent months. It puts pressure on the bank to adopt measures to rein in these elevated prices. Recent data indicated that underlying Japanese inflation levels remained close to 40-year highs, extending beyond volatile items like fresh food and fuel prices.
Additionally, inflation in Tokyo grew more than expected in July, hinting at a potential nationwide inflation trend. Although it is widely anticipated that the BOJ will maintain interest rates at negative 0.1%, there is the possibility of expanding the range within which yields on 10-year government bonds fluctuate. Currently, this range stands at negative 0.5% to 0.5%.
The BOJ last modified the YCC policy in December amid mounting inflation and market pressure to tighten policy. This change marked the first adjustment to the YCC policy since its introduction in 2016. The policy’s purpose was to stimulate inflation by reducing short- to medium-term rates and increasing liquidity, without adversely impacting super-long yields and the returns of pension funds and life insurance companies.
However, this policy led to a significant decline in Japanese bond trading since its implementation. As Japanese inflation spiked over the past year, questions arose regarding the sustainability of the BOJ’s stringent approach, leading yields to test the upper limit of the YCC policy.
As per reports, the BOJ is now allegedly considering expanding or even eliminating the YCC range by the end of this year.
