MNI POLICY: BOJ Sees Little Chance Of JGB Intervention

Despite the sharp rise in yields, JGB market functioning has not deteriorated materially, easing the need for the Bank of Japan to conduct extraordinary bond-buying operations, which officials believe would ultimately be ineffective as volatility is driven largely by investor concerns over fiscal expansion and the government’s as yet unsettled plans, MNI understands.

While officials acknowledge BOJ intervention could temporarily slow market moves, the Bank judges it inappropriate to intervene in volatile JGB markets, as its operations are unlikely to alter investors’ underlying views, even if they can briefly curb the rise in yields.

With the fiscal year-end continuing to constrain trading, officials do not expect JGB markets to calm easily. (See MNI POLICY: BOJ Sees Higher JGB Yields Ahead of FY-End) Officials also see no signs of panic or disorderly trading. Results from the BOJ’s regular JGB operations show no evidence of widespread rush selling, in contrast to the severe conditions observed last April and May.

Although the BOJ has pledged to conduct extraordinary JGB operations if necessary, officials note the market would interpret such action as signalling concern over specific yield levels, raising the threshold for intervention. It is also very unlikely the government would publicly urge the BOJ to curb rising JGB yields, as such a move could trigger yen selling, though officials remain mindful that unofficial pressure could still emerge.

The 10-year JGB yield rose to 2.380% on Tuesday, its highest level since February 1999, amid market reaction to Prime Minister Sanae Takaichi’s decision to dissolve parliament and call a snap election for Feb 8.

YIELD FOCUS

With inflation expected to stabilise around 2%, officials argue long-term interest rates, including roughly 1 percentage point of productivity growth, remain too low at current levels. They also note that while the BOJ’s 0.75% policy rate is its highest in 30 years, the 10-year JGB yield stood above 3% three decades ago.

While higher long-term rates do not immediately affect economic activity, officials are monitoring whether rising yields tighten financial conditions, including commercial paper and corporate bond issuance. They see the rise in the short-term prime rate, which is directly linked to the policy rate, as having a more immediate impact on lending rates and economic activity.

Officials are also alert to the risk that global fiscal expansion could push long-term interest rates higher worldwide, tightening financial conditions, a concern increasingly discussed at international financial meetings.