The Bank of Japan is cold about bond market fluctuations Ueda Kazuo says that the new high yield reflects economic reality

The Zhitong Finance App learned that, according to people familiar with the matter, Bank of Japan officials believe that even if the benchmark yield reaches the highest level since 2008, there are still many reasons to oppose intervention in the bond market, and explained in detail the ideas behind Governor Ueda Kazuo's recent remarks.

Speaking at the Diet on Wednesday, Kazuo Ueda said he is not concerned about the recent upward trend in yield because it reflects the market's views on the Japanese economy, inflation, and changes in overseas interest rates. He said that the Bank of Japan is generally in agreement with these views.

People familiar with the matter said that officials are determined not to intervene in the market unless extreme fluctuations occur because they are concerned that setting a threshold for traders will affect the functioning of the market. They said that the market should decide interest rates on its own, and investors need to adapt to a market environment where there was no central bank intervention after the end of last year's yield curve control plan.

People familiar with the matter added that officials believe the market is running healthy without speculative trading disruptions. Compared to other markets around the world, the recent market fluctuation is not unusual in their opinion.

These opinions suggest that although the Bank of Japan's official position is the same as before the cancellation of the yield curve control plan in March last year — that is, if the market fluctuates in a disorderly manner, they will intervene in the market — the threshold for market intervention has been raised. Ueda Kazuo's similar remarks on Wednesday also showed that the official position has not changed.

Meanwhile, more and more investors believe that the Bank of Japan's terminal interest rate may be higher than previously anticipated. This position triggered the most obvious increase in yield since the central bank stopped controlling Japan's yield curve.

On Monday, Japan's benchmark 10-year yield reached 1.575%, the highest level since 2008, and on Wednesday morning, the yield on 20-year bonds rose to a similar level. On the same day, 30-year bond yields climbed to their highest level since 2006.

Behind the scenes, officials knew very well that any direct action or suggestion of action would mean that traders would regard the yield level at the time as a threshold, thereby affecting the functioning of the market. People familiar with the matter said that due to similar concerns about the functioning of the market, officials believe that a fixed interest rate operation may be a last resort because it will send a strong signal about the level of yield.

People familiar with the matter said that if the Bank of Japan determines that it needs to intervene in the bond market, the bank may show a sense of urgency through various methods before taking direct action, including changing the tone of Kazuo Ueda's remarks or adjusting its monthly bond purchase plan.

Although bond yields have climbed to decades-long highs, the volatility of the Japanese interest rate market is far lower than that of other major markets due to the Bank of Japan's large-scale bond purchases and the tightening of controlled policies.

The 3-month implied volatility of the 10-year overnight index swap derivatives, which reflects the volatility of the Japanese bond market, is about 50 basis points, which is half of the same level in the US, and less than 85 basis points in the Eurozone.

Kazuo Ueda said last month that the central bank would act under “special circumstances.” People familiar with the matter said that Bank of Japan officials did not agree on the definition of “special circumstances,” but an obvious market crash may prompt them to act.

The Bank of Japan still holds about half of the Japanese debt market. People familiar with the matter said that central bank officials will pay close attention to whether the financial situation becomes tight or whether the stable formation of yields in the bond market is hindered.