One of the more jarring, if underreported shifts in the world of central bank finance over the past three years, was the dramatic decline in the BOJ’s annual purchases of JGBs, which has shrank drastically from its 2015 peak, and was back to levels first seen just after the start of Japan’s QQE.
And yet despite this obvious tapering in the BOJ’s QE, the yield on 10Y JGBs has not increased; on the contrary, courtesy of the paralyzed Japanese bond market, where barely anyone is left to trade with the BOJ now owning more than half of all government bonds, price formation has been made virtually impossible, and furthermore, as a result of the recent sharp drop in global yields, the benchmark 10Y JGB has seen its yield slide from 0% at the start of the year to -0.15% in recent months, and most recently take a sharp move lower as it plunged to the lowest on record at -0.25% as of today.
This plunge in JGB yields to a level below the JGB’s lower bound on its Yield Curve Control corridor which extends to -0.20%, prompted some to comically expect the BOJ to start selling bonds…
JAPAN 10-YEAR LEAD BOND FUTURES RISE TO RECORD HIGH OF 154.97
Is BOJ going to sell some to keep rate in corridor
— zerohedge (@zerohedge) August 15, 2019
… while other, more serious, traders expected the BOJ to announce a sharp cut in the amount of JGB bonds in the 5-10 year bucket it would repurchase at today’s rinban, or POMO, operation.
As Mitsubishi UFJ’s Katsutoshi Inadome noted, today marks the first buying operation in the 5-10 year zone since Japan’s benchmark 10-year yield fell below the bottom of the BOJ’s targeted range on Aug. 6, and with the yield since falling further and touching minus 0.25% on Thursday, if the BOJ didn’t announce or do anything when yields are looking set to decline further, it would be an issue – and a message – from the point of maintaining the yield curve control, namely that the BOJ no longer cares if yields go straight down.
The alternative was simple: reduce the amount of bonds the BOJ buys back, with some speculating that the BOJ could reduce purchases of 5-10 year zone by as much as 50BN yen – which would be the largest cut in this zone since the introduction of the yield curve control policy in September 2016 – while sending a very strong signal to the market against falling yields.
In the end the BOJ picked a middle option: it did indeed cut the amount of bonds in the 5-10 year bucket it would purchase, but the amount was less than the most aggressive expectations, dropping by 30BN yen, from 480BN yen to 450BN. This was the first cut in the core maturity zone since December 14.
However, while the Bank of Japan did as widely expected in response to the aggressive bull-flattening in JGBs, this move will hardly end the rally as the market tests Kuroda’s tolerance for yields underneath the target range, according to Bloomberg’s Tommi Utoslahti, who also writes that “today’s decision to trim 5-to-10 year bond purchases by 30b yen suggests BOJ’s yield-curve control settings remain unchanged — whereas leaving the operation sizes unchanged could have been seen as a de facto widening of the targeted range.”
Indeed, despite the shrinkage in stated BOJ purchases – amid what has already been a secular decline in BOJ bond purchases despite the ongoing QE – the market barely reacted, and the USDJPY is unchanged, while JGB futures remain close to 155.02 record high, and as Bloomberg notes, “will likely extend gains unless the BOJ provides more detailed insight into its thinking.”
Meanwhile, JGB bulls will have little incentive to not test the BOJ or cede control in their push to revisit the all time record low 10Y yield of -0.30%.