Jan 21, 2018 (Nikkei) - Many bond market participants were caught off guard on Jan. 9 when the Bank of Japan unexpectedly reduced its purchases of government bonds, instantly pushing yields higher. In the nine days that followed, long-term rates -- yields on 10 year Japanese Government Bonds -- hit 0.090%, the highest since July 2017.
More importantly, it was a sharp departure from the BOJ's target of keeping long-term rates around 0%.
The intense fascination in what was, in effect, a standard operation by the central bank points to wider investor edginess on the possibility that ultra-loose monetary policy in Japan, and around the world, may be coming to an end.
The BOJ said on Jan. 9 it would reduce its purchase offers for JGBs with 10 to 25 years until maturity, as well as for those with 25 to 40 years remaining, by 10 billion yen ($89.7 million) each. It was the first time in more than a year that the central bank curtailed its purchase operation for bonds with 10 to 25 years left to maturity.
What was the reason for the cutback? BOJ Gov. Haruhiko Kuroda has raised the issue of the "reversal rate" -- the level at which excessively low interest rates start to hurt the financial system and cause the effects of monetary easing to reverse.
In the financial world, money tends to flow into countries and regions where interest rates are rising. Until now, the favored destination was the U.S. But currency traders sense a change in the wind, and the Japanese yen strengthened against other major currencies following the BOJ's unexpected move.
But for BOJ watchers, the perception that the central bank is about to end its ultra-loose monetary policy sometime soon is off the mark.
"We see a strong possibility that this forex swing resulted from an overreaction by market participants, mainly overseas, who strongly expect an early rate hike by the BOJ," said Naohiko Baba, chief Japan economist at Goldman Sachs.
The BOJ holds its next monetary policy meeting on Jan. 22 and 23. "We expect Mr. Kuroda's comments at the press conference to tilt toward a dovish tone," Baba said.
Kuroda will likely stress that an exit from the ultra-easy policy is some time away, with inflation still far short of the 2% target. BOJ watchers say the central bank is expected to maintain its pledge to guide short-term interest rates at minus 0.1%, and 10-year bond yields around 0%.
But Baba and others are unconvinced the BOJ can tame speculation that a policy change is in the offing.
