BOJ JGB Buying on the Rise Again, Interest Rate Trends May Lead to Temporary Operations

THE NIKKEI via scoutAsia

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September 12, 2022 4 min read
BOJ JGB Buying on the Rise Again, Interest Rate Trends May Lead to Temporary Operations

The BOJ's purchase of government bonds is increasing again at present. This is because domestic interest rates have risen in pace with the rise in European and US interest rates, with the longterm rate approaching 0.25%, the upper limit of the range of fluctuation allowed by the BOJ. The rise in yields is particularly pronounced for very long-term bonds, which aren't subject to the BOJ's short- and long-term interest rate operations (Yield Curve Control). If interest rates continue to rise at a rapid pace, especially for ultra-long-term bonds, the possibility of a temporary purchase of government bond operations (open market operations) by the BOJ is a possibility.

On September 9, the BOJ purchased 32.7 billion yen through "limit order operation," in which the BOJ purchases unlimited amount of long-term JGBs at specified yields. The purchase at the operation was the second consecutive day of purchases, and the amount of purchases on 9th increased from the amount of purchases on 8th (22.5 billion yen). The 8th purchase through the limit order operation was the first since June 28. On the other hand, in the regular purchase of government bond operation conducted on 7th using the bidding method, the amount of purchase for the remaining term "5 to 10 years" was increased to 550 billion yen from the originally planned amount (500 billion yen). In July and August, they only purchased the same amount as originally planned in their regular operations.

The current increase in the BOJ's purchase of government bonds is largely due to rising interest rates in the US and Europe. On 8th, the European Central Bank (ECB) decided to raise interest rates by 0.75%, three times the normal range. Fed (Federal Reserve) Chairperson Powell also reiterated the person's intention to continue raising interest rates in an online event the person participated in on 8th. Major foreign central banks have shown a rush to tighten monetary policy, pushing up US and European interest rates. The US long-term rate continued to hover around 3.3% in trading on 9th, Japan time.
The ongoing depreciation of the yen in the foreign exchange market has in part led to government bond purchases by the BOJ. In the Tokyo market on 9th, Although the yen has weakened against the dollar due to the Bank of Japan's Haruhiko Kuroda meeting with Prime Minister Fumio Kishida, the yen is still significantly weaker than it was a month ago (about 135 yen) at around 142 yen per dollar. The weak yen is likely to strengthen speculation that the BOJ will move to revise its monetary policy, which is why the market is trading at "The BOJ has indicated that it will continue to respond to rising interest rates with purchases of government bonds as it has in the past" (Yurie Suzuki of Mizuho Securities).

The long-term rate hovered at 0.245% in the domestic bond market on 9th, unchanged from the previous day. Supported by limit order operations and other factors, the rate has stopped just before the BOJ's upper limit of 0.250%. On the other hand, yields are rising noticeably for very long-term bonds. Yields were temporarily 0.010% higher than the previous day for the new 20-year bond at 0.955%, the highest level since mid-January 2016, and 0.025% higher for the new 30-year bond at 1.320%, the highest level since mid-December 2015. This is a return to the level prior to late January 2016, when the BOJ announced the introduction of the Negative interest rate.

The yield increase in very long-term bonds is "represents an increase in the pressure on higher interest rates" (Naomi Muguruma of Mitsubishi UFJ Morgan Stanley Securities). Unlike 10-year bonds, the BOJ's limit order operations cannot be stopped, so super-long-term bonds are more likely to reflect the impact of rising overseas interest rates. "The issuance of ultra-long-term bonds has increased, highlighting the weakness of demand (relative to supply) during a period of rising interest rates" (Takafumi Yamawaki of JPMorgan Securities) aspect is also relevant.

"There is a possibility that (the BOJ) could move to conduct temporary operations on ultra-long-term bonds" (Naomi Muguruma of Mitsubishi Morgan) if the momentum of rising yields on ultra-long-term bonds strengthens further. Yurie Suzuki of Mizuho Securities believes "The standard speed is about 10 basis points (one basis point is 1/100 of a percent) in a few days" based on the circumstances of past temporary operations. The BOJ is unlikely to relax its caution for the time being in the face of rapidly rising interest rates.

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The English translations provided through this service are the result of automatic and mechanical translation of contents written in Japanese and created by Nikkei or licensed by a third party, by an automatic translation system provided by a third party after certain processing of the contents by Nikkei. Nikkei disclaims all warranties, express or implied, related to the English translations, including any warranty of accuracy, reliability, validity and fitness for a particular purpose. Users shall use this service with the full understanding that it employs an automatic translation system that automatically and mechanically recognizes and analyzes information and outputs the results.