FAST FIVE: BOJ Cuts Purchases Of 5-10 Year Bonds For The First Time Since December
And yet despite this obvious tapering in the BOJ's QE, the yield on 10Y JGBs has not increased; on the contrary, courtesy of the paralyzed Japanese bond market, where barely anyone is left to trade with the BOJ now owning more than half of all government bonds, price formation has been made virtually impossible, and furthermore, as a result of the recent sharp drop in global yields, the benchmark 10Y JGB has seen its yield slide from 0% at the start of the year to -0.15% in recent months, and most recently take a sharp move lower as it plunged to the lowest on record at -0.25% as of today.
This plunge in JGB yields to a level below the JGB's lower bound on its Yield Curve Control corridor which extends to -0.20%, prompted some to comically expect the BOJ to start selling bonds.
As Mitsubishi UFJ's Katsutoshi Inadome noted, today marks the first buying operation in the 5-10 year zone since Japan's benchmark 10-year yield fell below the bottom of the BOJ's targeted range on Aug.
The alternative was simple: reduce the amount of bonds the BOJ buys back, with some speculating that the BOJ could reduce purchases of 5-10 year zone by as much as 50BN yen – which would be the largest cut in this zone since the introduction of the yield curve control policy in September 2016 – while sending a very strong signal to the market against falling yields.
In the end the BOJ picked a middle option: it did indeed cut the amount of bonds in the 5-10 year bucket it would purchase, but the amount was less than the most aggressive expectations, dropping by 30BN yen, from 480BN yen to 450BN.