Kuroda’s wider yield band faces inflation test in Japan

Bloomberg

The Bank of Japan (BOJ) responded to market pressure this week by unexpectedly increasing its band for the 10-year bond yield. The new ceiling is already coming under threat.
The benchmark yield jumped to as high as 0.48%, the day after the BOJ doubled the top of its allowable range to 0.5%. Similar-maturity swap rates have increased to 0.74%, indicating traders are anticipating yields will break above that level. One immediate trigger may be Friday’s inflation data.
“The bond market could fall and put pressure on the BOJ again,” said Ayako Sera, a strategist at Sumitomo Mitsui Trust Bank Ltd in Tokyo. “The BOJ will work hard to defend the 0.5% ceiling” but the yield is expected to stay around that level going forward amid elevated inflation, she said.
Japan’s national consumer prices excluding fresh food probably increased by 3.7% in November from a year earlier, the highest level since 1981, according to a Bloomberg survey of economists.
BOJ Governor Haruhiko Kuroda and his colleagues jolted global markets by widening the target band for the central bank’s yield-curve control, sending yields soaring at home and abroad as investors saw the move as the end of its ultra-dovish monetary policy.
The central bank pushed back against that interpretation, saying the decision was aimed at improving domestic trading conditions. At the same time, the BOJ has sought to rein in the surge in yields by increasing purchases. The monetary authority offered to buy more than ¥1.3 trillion ($9.9 billion) three- to 10-year debt in its latest additional operation.
The weight of BOJ buying saw the 10-year yield drop back to as low as 0.385% on Thursday, though it’s still up from 0.25% at the end of last week.
Yields on other bond maturities have also risen. The two-year yield briefly climbed above zero for the first time since 2015, while the five-year yield surged to 0.26%, the highest since 2013.
The BOJ’s next move may be to ditch its negative-rate policy to enhance the functioning of the local bond market, Goldman Sachs Group Inc said in a research note.
Others see the five-year bond as the next battleground between the BOJ and traders
sensing a further relaxation of its policy.

Japan eyes record budget as BOJ shock pressures funding costs

Bloomberg

Japan will again resort to bond issuance to help fund another year of record spending, with the BOJ’s surprise policy move this week set to put pressure on borrowing costs going forward.
The government will look to issue bonds worth more than 35.6 trillion yen ($270 billion) to finance an initial budget of more than 114.4 trillion yen for the year starting in April, according to a draft document obtained by Bloomberg.
The spending plan is expected to be approved by PM Fumio Kishida’s cabinet. The proposed budget comes at a critical time for Kishida as he grapples with a planned historic boost to defense spending amid falling approval ratings.