Ueda to observe risk of high long-term bond yields affecting shorter-term rates
Bank of Japan Gov. Kazuo Ueda has vowed to monitor the impact that rising yields on super-long bonds may have on debt with a shorter maturity, hinting at concern a day after the government signaled its intention to address growing market distress.
"If super long-term interest rates fluctuate significantly, we will keep in mind the possibility that such fluctuations could affect long-term or even short- to medium-term interest rates,' Ueda said in parliament Wednesday in response to questions.
The governor explained that authorities prioritize their attention on shorter term rates because they have a more direct impact on economic activity, based on the bank's past analysis.
Ueda's comments come at a time of heightened concern about volatility at the long end of the bond market. Yields on 40-year Japanese government bonds rose Wednesday morning ahead of an auction of 40-year notes that is seen as a test for longer-maturity bonds amid global concerns about government spending.
The challenges in Japan's bond market have been exacerbated by the central bank's rolling back its purchases, and the reluctance of institutional investors to fill the gap.
Ueda's remarks Wednesday elaborate on what he said last week when he noted merely that he would watch movements carefully.
The rise in yields Wednesday morning was a reversal from a day earlier, when bonds rallied following news that the Finance Ministry conducted hearings on bond issuance ahead of its talks with market participants next month. Yields on the 40-year maturity fell 25 basis points on notions the ministry may be prepared to adjust debt issuance to ease the turmoil.
The moves in Japan pulled yields lower on long-tenor debt from the United States to Germany, and spilled over into currency trading.
Ueda's comments are likely to help assuage concerns by showing his cautiousness and the fact that he's on the same page as the government.
Still, the BOJ has suggested there's a high hurdle for stepping into the market as it proceeds with the process of restoring the functioning of the bond market. The central bank inhibited that functioning through more than a decade of massive monetary easing, including the yield curve control program that ended last year.
Ueda's views on the bond market are drawing more attention than usual ahead of the BOJ's review of its bond purchases at its policy meeting next month. In reference materials for BOJ hearings with market participants last week, the bank included one market opinion citing little room for the bank to address worsening of supply and demand balance for super long bond yields. That was taken as an additional hint that the bank has little appetite to take action.
The Finance Ministry, in charge of the supply side of the bond market, sent a questionnaire to market participants on Monday evening that asked for their views on issuance and the current market situation, people familiar with the situation said earlier. That was unusual because of its timing and the wide group of people contacted.
Finance Minister Katsunobu Kato, who spoke in parliament along with Ueda, said he's aware that market participants see concerns over fiscal conditions behind the global yield surge.
"We agree that enhancing long-term growth potential is crucial for managing fiscal sustainability risks and improving wages and living standards,' he said. "In Japan, we need to firmly pursue this direction.'
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