Tokyo

JAPAN'S sovereign yield curve could steepen with the central bank buying less bonds if the policymaker decides to let the benchmark yield trade in a wider band, analysts say.

Yields of Japanese long-end bonds climbed after the Jiji news agency reported on Saturday that the Bank of Japan (BOJ) could let the 10-year yield fluctuate in a wider range than the 20 basis points around zero right now.

"The implication would be that the BOJ may prioritise boosting market mechanism, stoking market speculation for less bond purchases," said Naomi Muguruma, senior market economist at Mitsubishi UFJ Morgan Stanley Securities. "It would also mean the BOJ wants to increase super-long yields rather than lifting 10-year yield levels."

The central bank may be seeking to improve the pricing mechanism in the country's moribund bond market, where activity is subdued, by potentially letting yields track global benchmarks higher. Should the BOJ step back, it would be doing so at a time when the Japanese government is selling a record amount of debt to finance its pandemic-response stimulus budgets.

Japan's 10-year futures dropped as much as 29 ticks from the open on Monday, while the yield on the cash bond rose as much as two basis points at the open. Yields on debt maturing in 20 to 40 years also rose.

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Volatility in the Japanese government bond (JGB) market has stayed low while demand from local investors seeking higher returns capped the upside on yields in recent months. While Treasury 10-year yields have risen about 24 basis points, pulling other global benchmarks higher, since the November US election on concerns over a large Democrat-driven fiscal stimulus, JGBs have stayed little changed.

"If the BOJ is to make some tweaks and induce flexibility, it would have to cut back on purchases as its buying is what's keeping yields low," said Ataru Okumura, a strategist at SMBC Nikko Securities in Tokyo. "If markets deepen confidence that this low volatility environment will continue for a long time, investors will boost risk-taking in super-long bonds. The BOJ may want to arrest that concern."

BOJ board member Hitoshi Suzuki had said on Dec 3 that somewhat higher yields on super-long bonds would be beneficial for the management of public funds and a gradual rise in those yields is important for the stability of the financial system.

The BOJ is expected to keep its negative-rate policy on hold at its meeting on Thursday, though governor Haruhiko Kuroda could provide hints on a planned review of its policy framework in March. Mr Kuroda said last month that the BOJ won't consider shortening the target maturity.

"With markets more sensitive to BOJ buying than a shift in 10-year yield ranges, players will be closely watching whether 5-10 year purchases will be reduced for the February plan," Ms Muguruma said, adding that there may not be much impact from a cut in purchases in super-long zones as they amount to just 300 billion yen (S$3.8 billion) currently.

BOJ is set to outline its plan for February bond purchases on Jan 29.

Mr Okumura at SMBC noted that a policy that's seen as a move towards normalisation may face hurdles. "The current upward pressure on yields may get an additional push on signs of an improvement in the corona-virus situation and if the yen doesn't appreciate further," he said. BLOOMBERG