Insights

Interest rate hikes in the US are a hot topic. Some believe that interest rates will continue to rise in order to control inflation. Meanwhile, the Bank of Japan continues its policy of keeping interest rates low. It was decided to implement "limit order operation" every business day in late April. How does it work?

Q: What does limit order operation mean?

A: It is a combination of "limit order," which is the desired price when placing an order for stocks, etc., and "operation." The Bank of Japan manipulates the amount of money circulating in the market by, for example, buying and selling government bonds in the money market. The Bank of Japan and market sources refer to this mechanism as "open market operations. The limit order operation is the Bank of Japan's unlimited purchase of JGBs at a specific level.

Q it does not understand how the trading of government bonds changes the amount of money.

A: Government bonds are traded in the market by institutional investors and others. So, if the Bank of Japan buys a large amount of JGBs, investors and others who sold the JGBs will get cash. As a result, more money flows into the market. Interest rates can also be manipulated in trading government bonds.

Q How does it work?

A: Long-term interest rates, such as one year or longer, are determined by the trading price of government bonds. For example, if a JGB trades at 100 yen and earns 2 yen interest after one year, the interest rate is 2%. If the same government bond goes to 99 yen, the interest rate will be slightly over 3% with a profit of 3 yen for 99 yen. This is because the lower you buy government bonds, the higher the yield you will receive if you hold them until redemption. If the Bank of Japan buys a large amount of JGBs, the price of JGBs will rise due to supply and demand, and interest rates will fall.

Q: What is the difference between a normal op and a limit order op?

A: In a normal operation, the amount of money to be purchased is indicated, but the price (yield) at which the money is to be purchased is not indicated. In limit order operations, the Bank of Japan buys JGBs at a specified yield (limit order) with no upper limit. In the morning, the Bank of Japan asks investors if they wish to sell their JGBs, and if any investors accept, the Bank purchases all of them.

Q: Will that transaction keep interest rates down?

A: The price of government bonds falls when interest rates are rising. From the point of view of an investor selling JGBs, there is no reason to sell them at a lower price than the Bank of Japan is willing to pay for them. Therefore, the price at which the Bank of Japan purchases the bonds is the lower limit of the JGB price, which means that interest rates will not rise.

Q: Why is the Bank of Japan trying to keep interest rates from rising?

A: Because there is a goal to raise prices. To this end, the government continues its policy of monetary easing to stimulate the economy by supplying funds to the market. Lower interest rates make it easier for companies and individuals to borrow, since financial institutions are able to lower the interest rates at which they lend funds to companies and others. The theory is that if economic activity increases and the economy improves, the likelihood of inflation will increase.

Q: Why did you start doing limit order operations?

A: One factor is rising inflationary pressure worldwide due to rising resource prices and other factors. In an attempt to curb inflation, some central banks abroad, such as in the U.S., have decided to raise interest rates. These trends have caused Japanese interest rates to rise as well. The Bank of Japan has set the maximum interest rate for 10-year JGBs at around 0.25%. Recently, the BOJ conducted a limit order operation when the rate approached 0.25% in March and April, and at the BOJ Monetary Policy Meeting in April, it was decided that the operation would be conducted every business day in principle.

Q: How long will the purchase of government bonds continue?

A: The Bank of Japan's decision to operate a limit order with no upper limit on the amount of purchase is seen as a strong indication of the Bank of Japan's intention to "We will not tolerate interest rates on the 10-year Treasury note exceeding 0.25%." Yasunari Ueno, chief market economist at Mizuho Securities, noted "the Bank of Japan considers the current inflation to be temporary, due to high oil prices and other factors. Monetary easing policy will continue until the Bank of Japan is able to achieve the desired form of inflation."
(Sachiko Kishida)

■ Recruitment of "Nikkei Lifestyle Monitor" for fiscal year 2022Nikkei is recruiting participants for the reader monitor "Nikkei Lifestyle Monitor" for the fiscal year 2022. It conducts a variety of surveys related to daily life and present them in "Money-no-Manabi" and other print publications. It would also appreciate your feedback on the article. QUO Cards will be drawn each month from those who complete the survey.