BoJ resorts to $19-bn bond purchase as yields rise to 1%

The Bank of Japan (BoJ) yesterday announced a ¥2-trillion ($19 billion) bond purchase programme as yields on benchmark 10-year government bonds surged up to its highest level over a year.

The 10-year yields shot to 1 per cent before settling down at 0.86 per cent yesterday, nearly three times compared with an all-time low of 0.35 per cent reached in April.

Despite assurances from the central bank chief Haruhiko Kuroda last month that his goal was to lower bond yields, the rates increased steadily. The governor's further comments earlier this week that such rises were 'natural' as the economic outlook improves, left investors confused about the bank's real intentions to deal with market moves.

According to market operators, lack of clarity on central bank's specific measures to deal with rising bond yields in its latest policy meeting Wednesday has caused market volatility and rising long-term interest rates. 

Moreover, US Federal Reserve chairman Ben Bernanke's remarks on possible tightening of monetary easing if the US economy recovers also aggravated the situation.

Due to the wild fluctuations in the bond market, the Tokyo Stock Exchange temporarily suspended trading on bond futures yesterday.

Japanese shares plunged over 7 per cent yesterday, the most in two years, trimming gains in recent months. The benchmark index Nikkei 225 has gone up about 80 per cent since mid-November, on the back of election promises on fiscal and monetary stimulus to spur economic growth by prime minister Shinzo Abe.

The BoJ's financial operations division said in a statement the operation to provide fixed-rate short-term loans to financial institutions was to respond to "the unreasonable increase in the volatility of long-term rates."

In its monthly report of recent economic and financial developments released yesterday the central bank said the monetary base has increased significantly as asset purchases by the Bank of Japan have progressed, and the year-on-year rate of growth has been in the range of 20-25 percent.

The report said, ''Japan's economy has started picking up''. It is expected to return to a moderate recovery path, mainly against the background that domestic demand remains resilient due to the effects of monetary easing as well as various economic measures, and that growth rates of overseas economies gradually pick up.

Earlier this week, in its monetary policy, BoJ said it will conduct money market operations so that monetary increase at an annual pace of about ¥60-70 trillion. It is about 70 per cent of monthly government bond issue.

The central bank further stated that quantitative and qualitative monetary easing will continue, aiming to rein in 15 years of deflation and achieve an inflation target of 2 per cent, as long as it is necessary for maintaining that target.

It is expected that the central bank will convene a meeting with market operators next week to discuss the technical aspects of the bond-purchase programme in order to ease the market impact.