Japan: "Nimble" JGB Intervention, but not now
As JGB yields edged higher on BoJ's further tightening, Japanese officials and BoJ members are voicing their concern over its potential impact. The BoJ has suggested "nimble" response to JGB market volatility after they removed Yield Curve Control last year but we think we will not see any response until yields hit higher levels.
10yr JGB yields have reached 1.46% in February 2025, a level last seen in November 2009. The rise in JGB yields are hardly surprising, given the stance of BoJ in terms of tightening, but the rapid increase in the past months have raised concern on Japan's financial health. BoJ's Ueda raised market participants' eyebrows when he suggest the bank could ramp up bond purchase if "abnormal" market moves trigger a sharp rise in yields but quickly followed up with the bank see current move to be grinding rather than abrupt. Moreover, BoJ deputy governor Uchida says the bank will taper JGB purchases despite recent yield moves.
Apart from BoJ officials, Japan’s Finance Minister Katsunobu Kato also warned that rising bond yields could further strain the country’s finances as Japan's debt to GDP ratios is already high. According to the IMF, Japan’s public debt is projected to reach 232.7% of GDP in 2025. The expected higher yield will further increase the financial burden of Japan. Japan PM Ishiba has responded in his FY 2025/26 budget by a cut of 343.7 billion JPY to 115.2 trillion. The budget see a reduction of new bond issuance to 28.6 trillion JPY but there will be more household subsidy and higher threshold for tax free income. With little intention to reduce spending in the FY 2025/26 budget, a sharp increase in JGB yields could harm the overall financial health of Japan and could force a cut in public spending.
Looking forward, it is hard to see another spike in JGB yields for the BoJ will not be signaling aggressive tightening. BoJ Governor Ueda has mentioned every 50bps the BoJ hike, there will be around a trillion JPY extra interest payment. Even if the BoJ is tilted towards more tightening when data allows, they have to assess the impact on their JGB holdings as they are the biggest holder in the market. Such favors gradual tightening than any frontloading of rates despite CPI has hiked higher in the past quarter and thus will likely see a slow grind higher in JGB yields, instead of a rapid rally.
If there is indeed a surprise spike in JGB yields, the BoJ will likely first verbally intervene by voicing their concern repetitively before announcing extra direct bond purchase program in the market. The magnitude will likely be similar to monthly purchase from the front to back end but focus on 10yr JGBs. The critical factor lies in the pace of rally in JGB yields before the line in the sand of 2% for now. A jump of more than 0.3% in a week would very likely to trigger the BoJ to intervene, so as a slow grind to 2% before the next rate hike from the BoJ.