Japan's 5-year govt bond yield scales zero on policy expectation

Japanese government bond yields climbed to multi-year highs on Friday as stubbornly hot inflation and more hawkishness from other major central banks spurred bets that the Bank of Japan would need to tighten policy soon.

The selling of JGBs forced 5-year yields above zero percent for the first time in six years, and came on the heels of the Bank of England's rate rise on Thursday and a shift in stance at the European Central Bank, which has been almost as dovish as the Bank of Japan.

The ECB kept policy on hold while acknowledging that mounting inflation could mean a rate rise this year was not as unlikely as previously flagged.

"Yields are on the rise on investor speculation that the Bank of Japan may have to tighten its monetary policy to follow the other major central banks," said Ataru Okumura, Japan rates strategist at SMBC Nikko Securities.

The 10-year JGB yield rose 2 basis point to 0.195%, the highest since Jan. 29, 2016, the start of the Bank of Japan's negative interest rate policy (NIRP).

The five-year yield gained 2 basis points to 0.01%, also a first since Jan. 29, 2016.

Under its yield curve control (YCC) policy, which was pegged to the NIRP in September of the same year, the BOJ pins 10-year yields at zero percent, but currently allows flunctuations of up to 25 basis points on either side of that.

Markets have been rife with speculation that the BOJ could shift its YCC target from the 10- to the five-year note, which would steepen the curve as an early step toward an eventual rate hike, even as policy makers have committed to continued monetary support for the time being.

Japanese consumer prices are rising at a 0.5% annual clip, the fastest pace in two years, but still well below the central bank's 2% target.

"As the yields on 10-year bonds get closer to 0.25%, the BOJ may have to revise its YCC framework before the central bank achieves its inflation target," said Masaaki Kanno, chief economist at Sony Financial Group and a former BOJ official.

"This is not favourable direction for the BOJ."

BOJ'S STANCE

BOJ Deputy Governor Masazumi Wakatabe said on Thursday he saw no major problem with recent rises in long-term rates as the 10-year yield remains within the implicit 0.25% cap the BOJ set around its zero percent target.

But the rise in the 10-year yield toward the 0.25% cap could prod the BOJ to step in to stem further increases, mostly likely by offering to buy unlimited amounts of bonds at a set price.

BOJ officials have said they are looking not just at the bond yield levels but the speed at which they move in deciding whether to intervene.

Thursday's developments at the ECB and Bank of England could pile pressure on the BOJ.

The U.S. Federal Reserve has also taken a more hawkish turn this year, making a rate rise in March a near certainty and leading money markets to price an additional 1 percentage point of increase by year-end.

A closely watched monthly U.S. payrolls report, due later on Friday, should offer additional clues on the pace of Fed tightening.

Benchmark 10-year JGB futures fell 0.27 point to 150.39, with a trading volume of 8,075 lots.