BOJ further boosts bond buying as yields advance to policy limit

The Bank of Japan has reiterated its strong commitment to ultraloose monetary policy with four days of unscheduled bond buying as the widening interest rate gap with the United States puts upward pressure on bond yields and weakens the yen.

The move comes as Japan’s benchmark 10-year yield stayed elevated at the 0.25% upper limit of the BOJ’s tolerated trading band despite announcing unlimited bond purchases for the first time since late March. Similar maturity Treasury yields hovered just below 3% — underscoring a rate differential that’s driven the yen to a 20-year low.

“The BOJ is demonstrating that its stimulus resolve hasn’t shifted even with the yen weakening rapidly,” said Tomo Kinoshita, global market strategist at Invesco Asset Management. The bank won’t follow its peers in tightening policy while the economy is fragile and inflation is being fueled by cost pressures rather than demand, he added.

The BOJ said actions were taken in light of recent yield moves and that consecutive fixed rate operations are aimed at firmly attaining the bank’s yield curve control target.

The Japanese currency weakened to little more than half a yen from the key ¥130 level versus the dollar in early trading Wednesday, before bouncing back to ¥128.59 in the afternoon in Tokyo. After 13 straight days of declines, investors were also said to be buying the yen to close out short positions.

The BOJ followed up an earlier announcement of unlimited fixed-rate operations with a statement saying it would make similar purchases on the next four trading days to April 26.

During its weeklong tussle with markets last month, the BOJ said it would ramp-up its scheduled purchases before the market open, drawing attention to its determination to keep a lid on yields. This time around, it left scheduled purchase amounts unchanged and advised on its fixed-rate buying at the usual operation time, helping to avoid unduly adding to yen-selling appetite.

“While the dollar-yen is pausing after the rapid pace of rally, its uptrend remains intact as the U.S. raises rates more while the BOJ is not changing policy,” said Jun Kato at Shinkin Asset Management in Tokyo.

While surging inflation in other parts of the world spurs policymakers to raise interest rates, the BOJ stands out with its commitment to loose policy to boost a moribund economy. Dogged by decades of minimal price appreciation, the central bank is much less willing to withdraw stimulus until it’s convinced a revival will become sustainable.

The BOJ announces its latest policy decision on April 28, when it is also due to release inflation forecasts that are expected to show much stronger price growth this fiscal year. While economists are expecting the central bank to hold firm with policy, should market pressure on the yen and yields intensify in the intervening days, speculation of a tail-risk surprise could grow.

Amid the mounting pressure on the BOJ, some economists have speculated that it could shift its 10-year yield target to a shorter maturity. The International Monetary Fund’s Japan mission chief said Wednesday that this should be looked at in the longer term, but not now.

Analysts differed on the likelihood that the Finance Ministry will intervene via the BOJ in an effort to curb the yen’s rout.

Joseph Capurso at Commonwealth Bank of Australia said in a note the odds were rising, though “we do not know what level of dollar-yen is the ‘line in the sand.’”

Kato at Shinkin said the probability remains low.

The yen has declined this year against more than 30 major currencies tracked by Bloomberg, led by a 34% slump versus the Brazilian real.

Selling the yen has become a favorite trade, with asset managers placing record short bets, as the dovish Bank of Japan keeps policy rates anchored to the floor. Japan’s position as an energy importer at a time of rising oil prices has also weighed.

Leveraged funds are wagering on further declines, with their net-short positions just off the highest in more than three years, data from the Commodity Futures Trading Commission show.

Selling the yen to buy a basket of five higher-yielding Group-of-10 currencies (the U.S$., Canadian dollar, New Zealand dollar, British pound, Norwegian krone) has returned 11% this year, with a bulk of the gain stemming from a change in the currencies rates rather than interest income, according to data compiled by Bloomberg.