TOKYO : Market forces have pushed Japanese government bond yields above policy targets. The moves are the biggest test in seven years of yield control in Japan, and dealers say the central bank's dominance of trading is making the market barely functional.Consisting of more than 1,000 trillion yen of debt, Japan's government bond market is one world's largest, but over the past seven years of a policy called yield-curve control has become one of the least liquid.
"A little after 10 a.m., we check what the BOJ will announce, and that determines the market move of the day," said Tomohiro Mikajiri, head of yen and non-yen fixed income trading in Japan for Barclays. Because the BOJ binds only overnight and 10-year rates, market participants have priced higher yields on all other tenors, driving eight-year yields to 0.62 per cent, above 10-year yields, and 15-year yields far above at 1.15 per cent.The sheer scale of the BOJ's ownership and buying volume, as well as short-selling from foreign investors who are betting on a policy shift, means the market has little to no role in setting benchmark debt prices or the cost of public financing.
Foreign short-selling in recent weeks has only added more pressure to an already distorted market. Interest rate swaps, which in most markets closely track sovereign bonds, rose above 1 per cent at the 10-year tenor on Monday.Short-term swaps have spiked, too.
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