Bank of Japan eases bond market strains with loans to banks
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- 24 Jan 2023
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Expanded lending package gives central bank a boost in struggle to contain government debt yields
The Bank of Japan appears to have reached a truce with bond traders betting it will have to ditch its efforts to control yields on government debt, as an expanded programme of loans to banks helps ease relentless recent pressure on the Japanese bond market.
After more than a month battling huge speculative bets by hedge funds with record purchases of government bonds, the BoJ last week opted to maintain the main pillars of its ultra-loose monetary policy and indicated it had no plans to abandon so-called yield curve control. The central bank also extended a critical lending tool, a measure that has aided a rebound in Japanese government bonds.
Under the expanded lending programme, the BoJ will offer loans of up to 10 years to banks at variable rates, instead of at a previous fixed rate of zero per cent.
Analysts said banks were likely to plough some of this cash back into the bond market, which would help stabilise the yield curve. In the first auction for five-year funds on Monday, the BoJ received bids totalling ¥3.13tn ($24bn), three times the amount that was offered, at an average successful bid yield of 0.145 per cent.
“The markets are responding favourably to this programme and the bids settled at just the right level with an average rate of 0.145 per cent, which suggests that banks will continue to take part in the next auction,” said Takenobu Nakashima, chief rates strategist at Nomura. “This has increased the chances that the yield curve control will be sustainable.”
During the BoJ’s struggle against the market in early January, interest rates on the benchmark 10-year Japanese government bond rose above the central bank’s target ceiling of 0.5 per cent, propelled by traders who believed they could force outgoing governor Haruhiko Kuroda to scrap his signature policy. Read More…
