As expected, there were no major changes announced during this week’s BOJ rate statement, as the central bank kept rates steady. Meanwhile, it followed up on its promise to expand monetary supply by purchasing up to 70 trillion JPY worth of government bonds each year.
In addition, BOJ officials took a somewhat optimistic tone during the meeting, as they raised their outlook on the Japanese economy, highlighting that it was “starting to pick up”. Officials pointed to the last quarter’s improvement in GDP figures, which were supported by strong consumer spending.
While the BOJ is confident that a weakening yen will continue to boost exports (and in turn, production), they did address concerns about the recent spike in bond yields.
What the heck are bond yields, you ask?
As discussed in the School of Pipsology, a bond is an “IOU” issued by an entity when it needs to borrow money. Entities do this because they need cash to fund their large-scale operations, so they end up borrowing from banks, large corporations, or even average Joes like you and I. In this case, the entity would be the government of Japan.
Bond yields refer to the rate of interest that the bondholder receives. In plain English, this refers to the return you’d get for holding the bond.
When bond yields rise, it means that the issuer has to pay the bondholder high returns for the loaned funds. Rising bond yields, which can be a side effect of upbeat growth prospects, would make it more expensive for the issuer to sustain operations and to raise more funds in the future.
Over the past couple of weeks, yields on 10-year Japanese government bonds jumped by 23 basis points, chalking up its sharpest climb in the past five years. Further increases in yields could make it more difficult for the government to repay its loan obligations later on, leading some analysts to raise concerns about a potential sovereign debt crisis.
Hiromasa Yonekura , the head of Japan’s biggest business federation, urged the Japanese government to restrain the volatile moves in bond yields and to stay true to its commitment to maintain fiscal stability. As for the BOJ, it can still make use of the monetary policy tools in its shed to calm the bond markets.
In fact, the central bank already stepped into action earlier this week when it offered to inject 2.8 trillion JPY in the Japanese money market. Since this is more than thrice the usual amount offered in a single day, the significant increase in liquidity could be enough to reduce volatility for the meantime.
Moving forward, the central bank can still opt to adjust the size and scope of its JGB purchases. BOJ Governor Kuroda doesn’t seem to be too concerned about the spike in volatility and bond yields at the moment, as the BOJ can easily decide to boost liquidity to stabilize the bond market.
However, they must calculate their next steps precisely in order to refrain from over-stimulating the economy. After all, the resulting increase in money supply could ramp up growth speculations, which could then drive bond yields even higher.