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Japan’s government bonds break the yield cap, so the Bank of Japan buys them and gives loans.

The yield on Japan’s 10-year government bonds broke through the top end of the Bank of Japan’s policy band for the second day in a row on Wednesday. This caused the central bank to buy emergency bonds and offer loans to the market.

Investors have once again criticised the Bank of Japan’s (BOJ) ultra-low interest rate policy. They expect that the central bank will get rid of its yield curve control (YCC) policy when the new governor, Kazuo Ueda, takes over in April.

On Wednesday, the yield on 10-year JGBs went up to 0.505%, which was above the 0.5% limit set by the central bank. This was the highest level since January 18. It was last worth 0.5%.

The BOJ bought 300 billion yen ($2.2 billion) worth of Japanese government bonds with maturities of five to ten years and 100 billion yen worth of bonds with maturities of 10 to 25 years.

“The emergency bond buying was a surprise because the latest attack on the BOJ’s policy is just getting started,” said Keisuke Tsuruta, a fixed income strategist at Mitsubishi UFJ (NYSE:MUFG) and Morgan Stanley (NYSE:MS) Securities.

Tsuruta said that the JGB yields followed the U.S. Treasury yields, which hit three-month highs overnight as investors priced in higher interest rates based on strong economic data.

Masayuki Koguchi, who is in charge of the fixed income division at Mitsubishi UFJ Kokusai Asset Management, said that he thinks the BOJ will do emergency operations when yields go up at least until the next policy meeting in March.

“But it’s not clear whether that works,” he said.

In January, the BOJ bought a record 23.69 trillion yen ($175.69 billion) worth of government bonds to try to keep yields down.

Attacks on the BOJ’s policy have come mostly from foreign investors. Data from the Japan Securities Dealers Association showed that they sold more than 4 trillion yen in JGBs in January, which was a record for a single month.

In order to stop speculation, the BOJ raised the minimum fee that financial institutions have to pay to borrow some 10-year Japanese government bond notes from Feb. 27 onward by four times.

The five-year JGB yield went as high as 0.245% on Wednesday, which was the highest it had been since January 18. It then went down to 0.240% after the BOJ said it would give 5-year loans to financial institutions in exchange for collateral.

The BOJ’s fourth loan operation of this kind is meant to get investors to buy 5-year bonds and to lower interest rate swaps with the same maturity that move with the 5-year JGB yield.

($1 = 134.6800 yen)


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