The Bank of Japan, struggling to keep the strengthening yen from derailing efforts to repair the economy, is facing a new challenge — the shrinking yield gap between two-year sovereigns and Treasuries.
The extra yield that two-year Treasuries offer over similar-maturity Japanese notes fell Tuesday to the least since 1992.
BOJ Gov. Masaaki Shirakawa said Aug. 4 that there is a "relatively high" correlation between that rate gap and the dollar-yen rate, as falling yield premiums in the U.S. dampen dollar-buying demand from Japanese investors.