By Kevin Buckland
TOKYO Japan's benchmark bond yield soared to a nine-year high and the yen gained even as traders struggled to make sense of the Bank of Japan's decision on Friday to conduct its yield curve control (YCC) policy more flexibly.
The 10-year JGB yield spiked to 0.575% for the first time since September 2014 as traders turned their attention to a bond buying operation that followed the policy announcement.
The BOJ maintained guidance allowing the 10-year yield to move 0.5% around the 0% target, but said those would now be "references" rather than "rigid limits".
And it quickly announced it would offer to buy 10-year Japanese government bonds (JGB) at 1.0% in fixed-rate operations, instead of the previous rate of 0.5%, signalling that it would now tolerate a rise in the 10-year yield to as much as 1.0%.
"By raising the upper limit for the fixed rate operations to 1%, the BOJ effectively widened the 10-year target band, making it easier for the central bank to flexibly guide the yield target," said Naomi Muguruma, a senior market economist at Mitsubishi UFJ Morgan Stanley Securities. "It made a stealth move in that sense."
Policymakers left the short-term interest rate target at -0.1.
The Japanese currency see-sawed sharply, flipping from losses after the policy announcement to as low as 141.20 per dollar before strengthening again, as traders assessed the guidance on yields, to be as much as 0.8% higher at 138.45.
The Nikkei share average initially pared the morning's losses with the BOJ's announcement coming just before trading resumed after a break, but then extended losses to last be down 2.4%.
The Tokyo Stock Exchange's banking index, however, surged on the prospect of a steeper yield curve, which would revive profit from lending. The index gained as much as 4.6% to reach an eight-year high.
(Reporting by Kevin Buckland; Editing by Shri Navaratnam)
