Bank of Japan (BoJ) surprised the financial market by offering to buy an unlimited amount of 5-year JGB notes at -4 basis points and 2-year paper at -9 basis points. However, the offer failed to attract any bids at the current market was pricing -4.7 basis points yield for 5-year notes and -10.2 basis points for the 2-year paper. Nevertheless, this marked that first action since the policy of yield curve control was introduced earlier in the year.

The BoJ has introduced yield curve control along with quantitative easing. Under this scheme, the central bank would continue to purchase ¥80 trillion worth of bonds per annum and would use auction and reverse auction to control the yields. For the short term bonds, it is more likely to use interest as a means to control the yields and use 10-year bonds to control the longer term yield. With today’s action, the central bank showed that it is willing to follow through the measures adopted.

However, if the global yields continue to rise over the fear of looming inflation, then the bank would face the real crunch, whether or not to buy the bonds at higher prices than the market. The central bank announced that it plans to keep the 10-year yield around zero. Today’s action was easy given the offers were above the market rate but a further decline in bond prices would make the situation more interesting.