Japanese government bonds swung and the yen fell as the central bank moved to reassert control over surging yields, while money market rates rose in China after officials boosted their target for a key benchmark.
Japanese 10-year yields briefly erased gains and the yen dropped after the Bank of Japan offered to buy an unlimited amount of bonds at a fixed rate in an unscheduled operation — a move viewed by market players as a sign that the central bank has been shaken by U.S. President Donald Trump’s criticism of its monetary easing.
Earlier in the day, the BOJ did not boost its buying of government bonds in its regular debt-buying operation as much as expected, driving up the benchmark 10-year interest rate to its highest level in a year.
The BOJ aims to keep the 10-year government debt yield at around zero percent as part of its stimulus program.
In the wake of a spike in long-term government debt yields, the central bank announced a “fixed-rate” bond-buying operation, more powerful than a regular one, for the first time since Nov. 17, resulting in a sharp drop of the 10-year government debt yield.
The BOJ’s move came days after Trump named China and Japan currency manipulators, effectively accusing the BOJ of intentionally lowering the value of the yen by drastically easing its monetary grip.
If Trump continues to blame Japan for manipulating its currency, it may be difficult for the BOJ to ease its monetary policy, which in turn will trigger a spike in long-term government debt yields and a stronger yen, market watchers say.
Soon after 10 a.m. Friday, the BOJ announced it will increase purchases of government bonds with maturities of more than five to 10 years to ¥450 billion from ¥410 billion as initially planned.
The larger than planned buying, however, fell short of market expectations, undermining market confidence in the bank’s “yield curve control” policy launched in September, aimed at keeping the targeted 10-year government debt yield at around zero percent by adjusting the amount of its bond purchases.
The yield on the benchmark 10-year Japanese government bond briefly jumped to 0.15 percent, a level unseen since January 2016, and the yen temporarily rose against the dollar.
At 12:30 p.m., the BOJ announced its fixed-rate buying operation, aiming to douse speculation that it may start tapering its aggressive monetary easing amid pressure from Trump.
The BOJ said it will buy an “unlimited” amount of Japanese government bonds with maturities of more than five to 10 years.
The BOJ’s yield curve control policy has contributed to curbing rises in Japan’s long-term interest rates. As the Japan-U.S. interest rate gap is expected to widen further, the dollar has risen more than 10 percent against the yen since Trump’s victory in the Nov. 8 U.S. presidential election.
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