2023-08-01 07:59:53
July 31, 2023 Today at 11:49 am
After relaxing its control of bond rates, the Bank of Japan bought back securities massively on Monday. An “ambiguous” decision, according to economists.
Japan is the most indebted country in the world. Yet he borrows at the lowest rates. An abnormal situation, the result of the ultra-accommodative monetary policy of the Bank of Japan (BoJ), which continually buys Japanese government bonds to keep rates down.
From now on, it is only a “reference” intervalwith the BoJ also indicating that it would offer a 1% fixed rate for its daily public bond purchases.
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Intervention surprise
In the bond market, these announcements boosted the yield on Japanese government securities to a level not seen since 2014, as investors seemed to be offloading en masse. The ten-year rate thus reached 0.615% shortly after Asian markets opened on Monday.
To avoid seeing them soar further, the Bank of Japan announced on Monday a five- and ten-year securities purchase operation, for a total amount of 300 billion yen (1.9 billion euros).
“Markets are gradually testing the waters to see when and how the BoJ will react.”
Shoki Omoro
Strategist at Mizuho Securities
This measure stabilized rates around 0.6%, but also caused the yen to fall against the euro and the dollar.
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“Volatility will be higher than before”
For Naomi Muguruma, economist at Mitsubishi UFJ Morgan Stanley Securities, BoJ’s actions are “ambiguous“, because policymakers had said they would “let the market decide the level of returns”, but the institution ultimately continues to act as an arbiter. “Today the line was 60 basis points, but tomorrow, it could be 65 or 70. Volatility will be higher than before.“
On the other hand, the fact that the rate has not yet reached its upper limit of 1% shows that investors are making a clear distinction between bond yield curve control and Bank of Japan policy rates (still at -0.1%), according to Shoki Omoro, strategist at Mizuho Securities. “In the medium term, I don’t see rates soaring. Markets are gradually testing the waters to see when and how the BoJ will react.”
In order to gauge investor demand for bonds at current rates, a new ten-year Japanese bond issue scheduled for Tuesday should be watched closely by the markets.
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