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BOJ Ends Yield Floor, Allowing Negative Rates

July 18, 2012

Opens Door to Negative Rates by Ending Yield Floor

Pedestrians walk past the Bank of Japan headquarters in Tokyo. Photographer: Tomohiro Ohsumi/Bloomberg

The Bank of Japan (8301) scrapped a 0.1 percent yield floor for government bond purchases, opening the door to the possibility of buying debt with negative returns.

The central bank removed the limit on purchases of securities with maturities of one year or less in its so-called rinban operation, BOJ spokesman Tsuyoshi Nakamura said in Tokyo.

The central bank is struggling to buy enough bonds to execute a stimulus program to strengthen the world’s third- biggest economy as Europe’s crisis and a global economic slowdown boost demand for the government’s debt. UBS AG said that the latest move indicated the central bank’s determination to press on with asset purchases and gave policy makers an extra tool if ever needed.

“I don’t think negative interest rates are going to happen any time soon in Japan, but this is probably a message from the BOJ that it’s ready to cope with any market turmoil stemming from the European crisis,” said Atsushi Ito, a senior rate strategist in Tokyo at UBS. “This shows their determination to fulfill their asset purchases as they’ve pledged.”

Japan’s benchmark 10-year yield fell to 0.755 percent as of 4:04 p.m. in Tokyo, matching the lowest level since 2003 reached last week.

The central bank tweaked its stimulus program on July 12 without adding extra money and said that it would buy more treasury bills. The overnight rate target stayed at between zero and 0.1 percent, unchanged since October 2010.

Purchase Failures

The BOJ failed to attract enough bids in its rinban purchases on July 6 for a second time since May, as banks chose to hang on to the bonds rather than take cash. A six-month funding operation also didn’t reach its bid goal for a 14th straight time on July 10.

“It didn’t look good for the BOJ to have a series of failures in their operations given they have been saying they are pursuing powerful monetary easing,” said Mari Iwashita, a bond strategist at SMBC Nikko Securities Inc. in Tokyo. “Allowing negative yields is an indication of their determination to fulfill the terms of the purchase program no matter what.”

Morgan Stanley MUFG Securities Co. said today that a “more active” monetary policy may emerge after new members join the Bank of Japan’s board, probably in August.

Yields on 5-year government securities also last week reached the lowest since 2003 as the central bank bought bonds and investors sought a haven from Europe’s debt crisis and a global slowdown.

Negative Yield

The European Financial Stability Facility, the region’s temporary rescue fund, yesterday auctioned 1.49 billion euros ($1.8 billion) of six-month bills at a yield of minus 0.0113 percent. The EFSF joined Belgium, Denmark, France, Germany, the Netherlands and Switzerland in requiring investors to pay for the safety of holding their debt. Japan bought 3 percent of the debt sold, a Finance Ministry official said on condition of anonymity because of the ministry’s policy.

Borrowing costs of Europe’s higher-rated nations have plunged since the European Central Bank cut its benchmark interest rate to 0.75 percent and lowered its deposit rate to zero on July 5. More than half of Europe’s money market funds by assets have closed because securities they invest in pay negative returns after the ECB move, according to Standard & Poor’s.

Elsewhere in Asia today, China reported that new home prices rose in 25 of 70 major cities in June from May, indicating that economic growth may be supported by a rebound in the real-estate market.

Bernanke Testimony

In the U.S., Federal Reserve Chairman Ben S. Bernanke will testify before Congress for a second day today as part of the central bank’s semi-annual monetary policy report. His policy makers “are looking for ways to address the weakness in the economy should more action be needed to promote a sustained recovery in the labor market,” Bernanke said yesterday.

The Fed’s Beige Book assessment of U.S. economic conditions is also due today. The residential property market may be one of the bright spots, with a Commerce Department report likely to show that builders began work on more houses in June than at any time since October 2008, according to the median forecast in a Bloomberg News survey.

The Bank of Canada is scheduled to give a monetary policy report today, while the U.K. gives jobless figures and the Bank of England will release minutes of its July meeting.

To contact the reporter on this story: Toru Fujioka in Tokyo at

To contact the editor responsible for this story: Paul Panckhurst at

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