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By Junko Fukita

TOKYO (Reuters) – Market forces have pushed Japanese government bond yields above policy targets. The moves are the biggest test of Japan’s yield controls in seven years, and dealers say the central bank’s dominance in trading has made the market barely functional.

Here’s what’s happening and what it means.


With more than 1,000 trillion yen ($7.9 trillion) in debt, Japan’s government bond market is the world’s largest, but over the past seven years the policy, called yield curve control (YCC), has become one of the least liquid.

To boost lending, growth and inflation, the Bank of Japan has kept short-term interest rates at -0.1% and the 10-year yield near zero since 2016. In that time, it has eased its tolerance to a move of 10 three times. yield above or below zero for the year, most recently in December when it suddenly widened its target range from plus-minus 0.25 percentage point to plus-minus 0.5 percentage point.

As bond yields rise when prices fall, the group’s cap protection has forced it to buy huge amounts of bonds, leaving more than half the market.


Trading volumes have been reduced as market participants struggle with sudden and large interventions by the BOJ, so the market is now waiting for the central bank on a daily basis.

“A little after 10am, we check what the BOJ will announce and that determines the market movement for the day,” said Tomohiro Mikajiri, head of yen and non-yen fixed income trading in Japan at Barclays.

“It is difficult to take a position without verifying whether the BOJ is conducting emergency bond-buying activities, and if so, what are the BOJ’s targets and at what prices?”

Japan’s yield curve, a line that connects yields to rising tenors, an arc of higher yields for longer-dated bonds in many countries, also rose.

With the BOJ only binding overnight and 10-year rates, market participants have priced in yields on all other tenors, pushing the eight-year yield to 0.62%, higher than the 10-year yield, and the 15-year yield much higher. higher than 1.15%.


The sheer scale of the BOJ’s holdings and buying volume, along with short selling from foreign investors betting on policy changes, means the market has little role in setting benchmark debt prices or the cost of government funding.

The bank’s holdings of Japan’s 368-year 10-year government bonds are close to total, at 97.0% on Jan. 10, up from Dec. 22, according to reports from Mitsubishi UFJ Morgan Stanley fixed income strategist Keisuke Tsuruta. from 86.4%. Securities.

The BOJ held 86.8% of 367 10-year notes on Jan. 10, up from 81.9% on Dec. 20, according to Tsuruta.

Short selling overseas in recent weeks has only added more pressure to an already distorted market. Interest rate swaps, which closely track sovereign bonds in most markets, rose above 1% for the 10-year on Monday.

The yield on that swap could indicate where the 10-year bond could be if the BOJ leaves the market alone.

Short-term swaps also increased.

“The attack on the BOJ, mainly by foreign investors, continues, and this is putting upward pressure on yields,” said Takafumi Yamawaki, head of Japan rates research at JP Morgan Securities.


Given the extreme market expectations, the BOJ must either abandon its YCC policy or at least double the size of its scope to restore any semblance of market functionality, analysts said.

“Even if the BOJ were to widen the range on the 10-year bond to 75 basis points, the yield would be 0.75 percent unless foreign yields fall,” said Barclay’s Mikajiri.

“Until the BOJ reduces its presence in the market and reverses its stance that it controls yield levels, market liquidity will not improve.”

For global markets accustomed to perennial BOJ and cheap yen funding, the change this week will come as a shock.

The yen has appreciated significantly since December. It hit a seven-month high as the Yomiuri daily reported last week that the BOJ would review the side effects of its monetary easing at this meeting.

($1 = 127.3 yen)

(Reporting by Junko Fujita; Writing by Tom Westbrook; Editing by Vidya Ranganathan and Bradley Perrett)


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