Article Highlights

  • BOJ tweaks policy to make its stimulus program more flexible
  • But it maintains pledge to keep long-term rates around zero pct
  • JGB 10-year yield drops, pulls sharply away from 1-1/2-yr highs
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Japanese government bond rallied on Tuesday after the central bank tweaked its monetary policy but pledged to keep interest rates “very low,” bringing relief to a market which had braced for more radical changes to monetary policy.

Following its two-day policy board meeting, the Bank of Japan took measures to make its massive stimulus program more flexible, reflecting its forecast that it would take time for inflation to hit its 2 percent target.

The central bank said long-term interest rates may fluctuate depending on economic and price developments and that it would conduct its bond-buying program flexibly.

It did, however, maintain the short-term interest rate target at minus 0.1 percent and a pledge to guide 10-year government bond yields around zero percent by a 7-2 vote.

Speculation and perhaps fear prior to the BOJ decision was that policy tweaks could include allowing interest rates to go higher. But the actual outcome showed the BOJ maintaining its short- and long-term yield targets and also its JGB buying amount under new guidance,” said Naomi Muguruma, senior market economist at Mitsubishi UFJ Morgan Stanley Securities.

It has become clear that the tweaks does not involve policy exits or interest rate hikes. JGBs are thus being bought back as a result.

September 10-year JGB futures were up 0.20 point at 150.64 after stooping to 150.24.

The benchmark 10-year JGB yield fell 3.5 basis points to 0.065 percent.

The 10-year yield had risen steadily over the last week, reaching a 1-1/2-year high of 0.11 percent on Monday as the market braced for the BOJ potentially considering steps to make its huge monetary stimulus more sustainable.

The spike by the 10-year yield prompted the central bank to conduct three special JGB buying operations over the past six trading days to limit the yield’s rise.

The yield curve flattened on Tuesday as super long JGB yields declined sharply after the BOJ policy decision.

The 40-year yield dropped 8.5 basis points to 0.880 percent, pulling away from a six-month peak of 0.965 percent.

Financial markets have been abuzz with speculation after various media reports suggested the possibility of BOJ tweaking its policy.

Some had speculated the BOJ could consider adjusting its yield-curve control (YCC) scheme, which it maintains by buying large amounts of JGBs. Repeated purchases of JGBs have robbed the bond market of liquidity, and near-zero rates under YCC have strained bank lending.

Separately, the BOJ announced its debt-buying operation plan for August, leaving its buying range for all the JGB maturities unchanged from July.