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.short-term interest rates at -0.1% and 10-year yields around zero since 2016. In that period, it has three times loosened its tolerance for movement of the 10-year yield above or below zero - most recently in December, when it suddenly widened its target band from plus or minus 0.
"It is hard to take positions without checking whether the BOJ conducts emergency bond buying operations, and if so which tenors the BOJ targets, and at which prices." The bank's ownership of the 368th series of 10-year Japanese government bonds is near total, at 97.0% on Jan. 10, up from 86.4% on Dec. 22, according to reports by Keisuke Tsuruta, fixed income strategist at Mitsubishi UFJ Morgan Stanley Securities.
"The attack on BOJ, mainly from foreign investors, continues, and that is putting upward pressure on yields," said Takafumi Yamawaki, head of Japan rates research at J.P. Morgan Securities.Given the extreme market expectations, the BOJ must either abandon its YCC policy or at least double the size of its band, to restore any semblance of market functionality analysts say.