BOJ commits to yield curve control - Nomura
The BOJ announced a fixed price 10yr JGB purchase operation today, as Nomura had expected as the Bank announced it would make unlimited purchases at +0.11%, slightly higher yield than the current market yield, and there were no bids, notes Yujiro Goto, Research Analyst at Nomura.
Key Quotes
“This is the first fixed price operation announcement since 3 February. The BOJ announced the same yield level for purchases as the February operation, showing no change to the BOJ’s view on the 10yr yield target, even though foreign central banks have been sounding less dovish recently. The Bank also increased its 5-10yr JGB purchases under rinban operations to JPY500bn from JPY450bn, showing the amount of JGB purchase can be flexible to control the curve.”
“Real 10yr yields in Japan have been largely unchanged over the past three weeks, while real yields in the euro area, UK and US have risen as central banks sounded less dovish. Widening real 10yr yield spreads are supporting JPY weakness, and the divergence between policy stances of the ECB and BOJ is especially prominent, as we expected.”
“The announcement today will have strong signalling effect to pressure JGB yields. As the BOJ did not purchase JGBs under the fixed price operation, this does not increase the balance sheet of the Bank. However, the impact on JGB and FX markets will be more important if global yields keep rising into key foreign central bank meetings in September, when the ECB is expected to announce its intention for tapering and the Fed could announce the beginning of quantitative tightening. The Bank may need to conduct an operation again as foreign yields rise. Then, it may need to purchase JGBs under the operation, similar to what occurred in February (the BOJ bought JPY724bn of JGBs on 3 February), and its commitment would be tested again. The BOJ’s strong commitment to control the yield curve could widen real rate differentials further, as foreign central banks move towards monetary policy normalisation.”