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Yen’s Descent, Yield Cap Attack Leaves Tokyo on Edge

There’s speculation the prospect of significant US interest rate rises and the yen’s slump may force the Bank of Japan’s hand on policy tightening

Bank of Japan
A man wearing a protective mask walks past the headquarters of Bank of Japan in Tokyo, Japan. Photo: Reuters


The Bank of Japan could be pushed closer to policy tightening by attacks on its yield cap and a slumping yen.

Investors betting the central bank could give in to global market forces could open up an opportunity for the bank to actually change tack, some observers have speculated.

While few expect the bank to make a change on Friday to its policy of yield curve control (YCC), which guides the yield on the 10-year Japanese government bond (JGB) around 0%, sharp falls in the yen currency are making some lawmakers anxious.


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The falls are driven partly by the central bank’s aggressive efforts to defend an implicit 0.25% cap for the yield target.

Five government officials and sources familiar with the central bank’s thinking say the key to its move on Friday could be how far the yen slumps from current 24-year lows to pose a big enough risk warranting a monetary policy response. 

“Central banks don’t target exchange rates in guiding policy,” one of the sources said. “But the yen has been falling at such a sharp pace it’s hurting the economy, which warrants attention.”

A second source echoed that view.

“We’re hoping the BOJ will take some sort of step at Friday’s meeting,” a government official told Reuters, speaking on condition of anonymity.

“It’s hard to think the BOJ won’t do anything when the US Federal Reserve could be raising rates by 75 basis points.”

Prime Minister Fumio Kishida said monetary policy affected not just currency moves but small and medium-sized firms through the cost of borrowing.

“While currency move is a huge issue, I expect the BOJ to take various effects into account,” Kishida told a news conference, when asked if the central bank should adjust policy on Friday.


BOJ’s Yield Cap Defence

Prospects of aggressive US interest rate rises have pushed up long-term interest rates around the world, including Japan, forcing the BOJ to ramp up bond buying to defend its yield cap.

The BOJ spent about 3 trillion yen ($22 billion) in buying bonds on Tuesday, following up with additional purchases on Wednesday across the yield curve to defend its cap of 0.25%.

Even so, the 10-year JGB futures plunged to levels last seen in 2014, on selling by speculators betting the bank will be forced to adjust its YCC policy.

“The JGB futures market collapsed and there was a big gap between futures prices and the actual JGB yield,” said Kentaro Koyama, Japan chief economist at Deutsche Bank.

“Usually, some kind of arbitrage action could solve this disparity. But this kind of arbitrage action is not working well – mainly due to the BOJ’s intervention.”

In theory, the BOJ can buy bonds indefinitely to defend the cap with the money it prints, but doing that would accelerate yen falls that inflate the cost of imports and hurt the economy.


Hawkish Fed Outlook

Markets expect the Fed to deliver a 75-basis-point increase at the Federal Open Market Committee (FOMC) meeting later on Wednesday, which could accelerate yen falls and add pressure on the BOJ.

“I remain concerned that the Bank of Japan policy meeting is an underrated risk point this week, perhaps even more so than the FOMC outcome itself,” said Jeffrey Halley, a senior market analyst for Asia Pacific at OANDA.

A very hawkish Fed outlook would lift the dollar/yen again and may force the BOJ into lifting the 10-year yield cap slightly, he added.

To be sure, there is little reason for the BOJ to modify YCC now, with inflation much lower than in Western countries and the fragile economy still in need of monetary support.

Veteran BOJ watcher Naomi Muguruma expects the BOJ to hold fast on Friday but said the bank could raise its yield cap to 0.50% from 0.25% if the government asked for help in arresting sharp falls in the yen.

Such an increase in the yield cap would be accompanied by yen-buying intervention by the government.

“This is a risk scenario in case yen falls continue, and it’s clear the moves are hurting corporate and household sentiment,” she said.


  • Reuters with additional editing by Sean O’Meara


Read more:

Japan Government Bond Futures Plunge as Traders Test BOJ

Yen Plunges as BoJ Vows to Hold Bond Yields at Zero



Sean O'Meara

Sean O'Meara is an Editor at Asia Financial. He has been a newspaper man for more than 30 years, working at local, regional and national titles in the UK as a writer, sub-editor, page designer and print editor. A football, cricket and rugby fan, he has a particular interest in sports finance.


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