Research Briefing | Feb 28, 2023

The catch-22 for the BoJ as it wrestles with yields

The Bank of Japan enhanced its funds-supplying operations in January, after widening the tolerance band for 10-year JGB yields in December. The January actions are aimed at bringing down yields while avoiding further direct JGB purchases, but long-term JGB yields are staying stubbornly high, and market liquidity has not recovered. Maintaining the Yield Curve Control (YCC) policy is more costly now than ever.

What you will learn:

  • Since the December meeting, speculation of further yield hikes has increased. The 10-year JGB yield has been staying close to the new cap, and a kink in the yield curve remains. With the BoJ aggressively purchasing the JGBs, all on-the-run 10-year JGBs have effectively been absorbed from the market. Money market rates imply the shortage of JGBs is severe.
  • To improve market liquidity, the BoJ is conducting securities lending daily, and raising its bid amount since late-December. Ironically, part of the bonds provided by this lending are used to construct short-sell positions in JGBs, resulting in further upward pressure on yields. To avoid such use, the BoJ has announced an increase in its fee. Given the new fee will be applied to all borrowers, this action is likely to limit liquidity provision.
  • The BoJ’s January decision lowered both the JGB and swap rates considerably. The operation came with solid demands from financial institutions, at least for now. However, its impact on the market has been limited except for the initial reaction.
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