By Kevin Buckland
TOKYO (Reuters) – Japanese government bond yields punched above the central bank’s 0.5% policy ceiling for a fourth straight session on Wednesday, ahead of one of the most highly anticipated monetary policy decisions globally in years.
Bank of Japan Governor Haruhiko Kuroda and his colleagues have investors on tenterhooks as they wait to see if the bank makes policy changes following its two-day meeting, from further tweaks to yield curve control (YCC) or even its full abandonment.
Although it has been only a month since the BOJ shocked markets by doubling the allowable band for the 10-year JGB yield to 50 basis points either side of the 0% policy rate – ostensibly to improve market function – the change emboldened speculators to test the bank’s resolve.
The time of the decision is not set but is expected between 0300 GMT and 0500 GMT.
The 10-year yield has repeatedly breached the BOJ’s ceiling, only to close back at the 0.5% limit on each day. On Friday, it spiked to a 7-1/2-year peak of 0.54.
The benchmark yield was 1 basis point higher at 0.51% as of 0215 GMT, after starting the trading day flat. Earlier in the day, it had eased as much as 1.5 basis points to 0.485%.
Ten-year JGB futures edged up 0.19 point to 145.03. They had dipped as low as 144.15 on Friday for the first time since March 2014.
“The trade-off for the BOJ here is shocking the market and creating some volatility event versus sort of digging yourself deeper into the hole,” said James Athey, investment director at Abrdn.
Athey, who has a short position on JGBs, said the best course of action for the central bank would be to get rid of YCC.
“Now is the time, because a lot of investors are short,” he said.
Taming yields has come at a cost, with the central bank splashing an unprecedented 10 trillion yen ($78 billion) on bond buying operations over Friday and Monday, calling into question the sustainability of the programme.
Also, signs ultra-easy monetary policy may need to end have come from hot consumer inflation and the possibility that stubbornly slow-to-rise salaries may also take off after Uniqlo’s parent company said it would raise wages by up to 40%.
The yen strengthened as far as 127.215 per dollar on Friday, the highest since May, amid bets stimulus was on the way out – if not immediately, then at least after Kuroda retires in April and a new governor comes in.
However, the heat has come out of the currency this week, and it last traded at 128.525, weakening some 0.3% compared with the previous session.
Japan’s Nikkei share average was 0.56% higher.
Beyond keeping the 10-year yield near zero, the BOJ has also been an outlier among global central banks for sticking with a negative interest rate policy (NIRP) that pins short-term rates at -0.1%.
“The debate around the future of BOJ policy is far from settled,” said Howard Smith, a portfolio manager at Indus Capital Partners.
However, “there seems to be no doubt, regardless of the political manoeuvring and the debate around the next governor, that YCC and probably also NIRP are reaching the end of their useful lives.”
($1 = 128.2200 yen)
(Reporting by Kevin Buckland; Additional reporting by Ankur Banerjee and Rae Wee; Editing by Bradley Perrett and Sam Holmes)
