The Japanese yen experienced continued strength following the Bank of Japan’s (BOJ) indication of a reduction in the monthly purchase of super-long government bonds. This move serves as a reminder that the central bank may consider cutting stimulus measures later this year. On Tuesday, the BOJ purchased ¥150 billion ($1.04 billion) of 10-to-25 year debt, mirroring the amount from the previous purchase on December 25. However, given the overall reduction in monthly operations, this signals a decline in purchases for the entirety of January.
Market indicators suggest that traders still anticipate the BOJ ending its negative interest-rate policy in the coming months, although the speculation of an immediate move in January has diminished. Traders are cautious about the central bank taking actions that could impact the economy, particularly in the aftermath of a powerful earthquake that struck Japan on January 1.
Keisuke Tsuruta, Senior Fixed-Income Strategist at Mitsubishi UFJ Morgan Stanley Securities Co., commented on the BOJ’s decision, stating, “The decision to leave the purchase amount of 10-25 year bonds today indicates a quite aggressive reduction for the month. The central bank probably wants to cut the buying whenever it can.”
The yen strengthened, reaching up to 0.6% against the dollar and reaching 143.42 after the BOJ’s announcement. Hedge funds in Tokyo reportedly sold the dollar for yen as the 10-year yield differential between the US and Japan narrowed, according to currency traders in Asia.
Overnight-indexed swaps now suggest that the central bank is likely to conclude the negative-rate policy by July, compared to the earlier projection of April at the beginning of November.
Yujiro Goto, Head of Japan Foreign-Exchange Strategy at Nomura Securities Co. in Tokyo, noted, “Expectations of the BOJ abolishing the negative-rate policy had fallen as much as they could.” The perceived reduction in the BOJ’s purchases of super-long bonds “may have revived” these expectations to some extent.
Additionally, the BOJ faces diminished pressure to buy bonds to prevent a surge in borrowing costs, as global debt yields experience downward pressure, thus keeping Japanese rates in check. Last month, Japan’s benchmark 10-year yields touched their lowest level since July 28, coinciding with the day the BOJ adjusted its yield-curve control in 2023.
Earlier data on Tuesday revealed a slowdown in consumer price gains in Tokyo for a second consecutive month in December, alleviating some pressure on the BOJ to take immediate action this month. The central bank had kept its monetary policy settings unchanged on December 19, providing no guidance on the potential end of negative rates.
Initially, the BOJ had indicated a minimum purchase of ¥100 billion for super-long bonds per operation, according to its quarterly plan. However, the amounts of purchases for other tenors remained unchanged in Tuesday’s announcement.
