Market News

RPT-BOJ sees JGB yield rise a headache but no spur to act

(Repeats item that first ran late on Friday) (For more stories on the Japanese economy, click [ID:nECONJP])

* BOJ sees recent bond yield gains as temporary, no big harm

* Some market players feel BOJ not doing enough on yields

* No BOJ consensus on what to buy if asset pool expanded

By Leika Kihara

TOKYO, Dec 10 (Reuters) - The Bank of Japan sees recent rises in Japanese government bond yields as a headache, although it is not nervous enough to consider topping up its modest new asset buying programme just yet.

If yields continue to climb, however, the market may start clamouring more loudly for the central bank to step up its bond buying, especially with economic growth already grinding to a halt and seen barely picking up in the early part of next year.

“Buying more JGBs with one to two years left to maturity would help to bring down long-term money market rates, which have not fallen despite the BOJ’s easing,” said Seiji Shiraishi, chief economist at HSBC Securities Japan.

“Rises in long-term rates would justify such a move.”

Many in the BOJ see the recent rise in bond yields as an unwelcome move contradicting its argument that its latest monetary easing helps to push down long-term interest rates.

But they also feel that Japanese government bond yields are rising for a reason the BOJ cannot control -- a surge in U.S. Treasury yields -- and so there is little the central bank can do to shift the tide.

They consider recent moves as temporary and hope that, after a wave of position adjustments runs its course, Japanese banks will resume their huge bond buying. Some think the BOJ does not need to fret unless 10-year JGB yields JP10YTN=JBTC jump, say, above 2 percent, still a ways off from current levels around 1.2 percent.

That is why the BOJ is taking a wait-and-see approach and feels no imminent need to boost bond purchases through an expansion of its 5 trillion yen ($60 billion) asset buying fund.

Recent yen declines and rising Tokyo stock prices also make the BOJ happy to stand pat at its rate review on Dec. 20-21.

“We won’t act just on bond yield moves alone. What’s important is the overall outlook for the economy,” a source familiar with the BOJ’s thinking said. Two other sources expressed similar views.

The BOJ, however, is in a tight spot.

Under the scheme crafted in October, the BOJ buys one- to two-year government bonds with the aim of pushing down the short end of the yield curve.

But two-year bond yields JP2YTN=JBTC in fact have been on the rise, briefly spiking to 0.23 percent on Thursday, well above the five-year low of 0.1 percent hit on Oct. 5 -- the day the BOJ eased policy and announced the new asset buying scheme.


The benchmark 10-year JGB yield hit a six-month high on Thursday after BOJ policymaker Yoshihisa Morimoto said he saw recent bond yield gains having no big harmful effects on the economy, disappointing some who had bet on imminent action.

JGBs rallied on Friday, taking back some of the ground lost after a week of heavy losses, but analysts said they would be vulnerable to swings in U.S. Treasury yields.

While the BOJ has said it was prepared to top up the asset fund if the economy worsens more than expected, it does not want to do so too soon, given that purchases of some type of assets, such as exchange-traded investment funds, have not even started.

Markets, however, are growing impatient, with some investors criticising the BOJ’s bond buying as too little to keep rates appropriately low.

“This is certainly not what the BOJ had expected to happen after it eased policy,” said Takeshi Minami, chief economist at Norinchukin Research Institute.

“The rise in bond yields has been quite sharp, which is not good for the economy,” said Minami, who expects the central bank to expand the asset buying fund as early as next month.

Of the 5 trillion yen, to be used by the end of next year to buy assets ranging from government debt to corporate bonds, the BOJ will spend 2 trillion yen on short-term government securities and just 1.5 trillion yen on JGBs.

While that is on top of 21.6 trillion yen in long-term JGBs the central bank buys outright each year, the amount is a drop in the ocean of Japan’s 730 trillion yen bond market.

If yields continue to rise, the BOJ may consider focusing more of its asset buying on bonds, perhaps by diverting money set aside for short-term government securities into JGBs.

The spread between investment grade corporate bonds and JGBs has narrowed significantly since the BOJ’s October monetary easing, which means the central bank may also find room to divert some money it planned to spend on corporate bonds into JGBs.

But there is no consensus yet within the BOJ on which assets to buy with any additional money that might be put into the asset fund pool, although realistically any increase would be spent mainly on JGBs. [ID:nTOE6AI06Y] ($1=83.66 Yen) (Editing by Edmund Klamann)