We warned last night that the runaway yields on Japanese Government Bonds were a worrisome signal that the Bank of Japan had lost control (as short-dated yields rose above target and 10Y broke above policy 0.00% levels). Sure enough, it appears Kuroda hit the panic button tonight as it announced it first ficed-rate unlimited bond purchase operation.
Simply put this is a government guarantee to bid on any and all offers for short-dated bonds at their mandated yield level until the selling abates.
And bond yields obeyed – dropping back to BOJ policy levels for now…
As Bloomberg reporets, the central bank said on Thursday in statements it will carry out two operations, one to buy securities maturing in one to three years, and another for debt of three to five years maturity.
A selloff in Japanese bonds had threatened to test Governor Haruhiko Kuroda’s determination to keep yields stable with unlimited debt purchases — a weapon he had so far kept in reserve. He had said in September that the bank would hold unlimited purchases as needed, setting a fixed rate, in order to control yields.
Ten-year sovereign yields turned positive this week for the first time since Sept. 21, when the Bank of Japan announced a shift in policy aimed at pegging them near zero percent. Kuroda added the option of holding purchase operations at fixed rates with no set amount to his toolkit following that decision.
“The market is testing the BOJ’s tolerance for higher yields, but the BOJ may actually challenge the market back by letting yields rise,” Jun Fukashiro, a senior fund manager in Tokyo at Sumitomo Mitsui Asset Management, said earlier. “The reason the BOJ can allow a rise in yields above zero is that, when it needs to, it has the weapons to stop it.”