BOJ Ready to Step Up Bond Buying Amidst Yield Surge

Bank of Japan (BOJ) Governor Kazuo Ueda signaled Friday that the central bank stands ready to increase government bond purchases if long-term interest rates spike, Reuters reports. This comes after recent yield increases, reaching their highest levels in about 15 years.

Ueda clarified that the BOJ's primary approach is to let market forces determine long-term interest rate levels, stating he would not comment on where yields might ultimately converge. He attributed the recent rise in yields to a modest economic recovery and an upward trend in prices.

"We expect long-term interest rates to fluctuate to some extent," reflecting evolving market perceptions of Japan's economic and price trajectory, Ueda told parliament when questioned about recent bond yield increases.

However, he emphasized that the central bank is prepared to act decisively if the market experiences abnormal fluctuations. "But when markets make abnormal moves and lead to a sharp rise in yields, we are ready to respond nimbly to stabilize markets," such as by expanding bond purchases, he stated.

Ueda's comments helped to pull down the 10-year Japanese government bond (JGB) yield to 1.42% from an earlier high of 1.455%, its highest level since November 2009. The yen also retreated from a 2-1/2-month high, aiding the Nikkei's recovery from earlier losses.

The recent steady climb in JGB yields reflects investor speculation that the BOJ might raise interest rates, currently at 0.5%, more aggressively than initially anticipated. Ueda acknowledged the possibility of further increases in the short-term policy rate, stating, "if the inflation outlook continues to improve," and adding that underlying inflation remains below the 2% target.

He also noted that the BOJ will carefully consider any potential unpredictable economic consequences when considering further rate increases.

The BOJ ended a decade of massive stimulus last year, including a policy that capped 10-year yields near zero through aggressive bond purchases. This was based on the assessment that Japan was on the verge of achieving its 2% inflation target on a sustained basis. The central bank also initiated a tapering of its large-scale bond buying under a plan outlined in July to halve monthly purchases to ¥3 trillion ($20 billion) by March 2026. This plan also included a commitment to ramp up bond purchases in exceptional circumstances to address any abrupt yield increases.

While unable to predict when the BOJ might conduct emergency bond market operations, Ueda assured that the central bank would closely monitor the market for any emerging signs of destabilization.