Market News

(Bloomberg) -- Bank of Japan Governor Kazuo Ueda signaled a readiness to intervene in the bond market to quell a surge in yields, reiterating the central bank’s commitment to supporting stability as the prime minister and finance minister voiced concerns about the potential impact of higher borrowing costs.

“Moves in bond yields fluctuate to a certain degree,” Ueda said in response to questions in parliament Friday. “However, we will purchase government bonds nimbly to foster the stable formation of yields in exceptional cases where long-term yields rise sharply.”

Bond yields fell and the yen weakened following Ueda’s comments. Earlier Friday, benchmark yields touched a fresh 15-year high of 1.455% after consumer inflation accelerated in January.

Prime Minister Shigeru Ishiba, also speaking in parliament, said the topic of high yields didn’t come up when he met with Ueda Thursday, but it’s something he’s monitoring from the perspective of fiscal management.

“A rise in interest rates when there are high debt-to-GDP ratios puts pressure on policy expenses through increased interest payments,” Ishiba said. “I have strong concerns about this.”

Earlier, Minister of Finance Katsunobu Kato told reporters that rising government bond yields may strain Japan’s already tight finances given the nation’s high debt-to-GDP ratio. Japan’s public debt will be 232.7% of gross domestic product this year, according to a report released earlier this month by the International Monetary Fund.

Taken together, the comments show that officials are monitoring markets closely at a time when economists are continuing to assess the outlook for the BOJ’s rate path, incorporating the risks of a faster and steeper tightening cycle in light of recent strong data.

“Markets were looking out for clues from Ueda with regards to the recent rise in JGB yields,” said Christopher Wong, a strategist at Oversea-Chinese Banking Corp. in Singapore. Ueda’s comments “serve as a reminder that the BOJ is watching markets closely, and policymakers can step in if there is any ‘excessive volatility’ in the bond space.”

Ueda gave little hint on whether any bond action might take place in the near term by also saying that yields are determined by the market. The recent yield rise probably reflects the market’s views on the economic recovery and improving inflation trend, he said.

“It’s inappropriate to discuss in advance the specifics of the kind of situation in which we would conduct the operation nimbly,” Ueda said. “We will decide by carefully watching the market by assessing whether yields are being formed stably.”

Ueda’s remarks were in line with the BOJ’s long-held stance. “In the case of a rapid rise in long-term interest rates” the bank will make nimble responses by increasing bond purchases and conducting fixed-rate operations, the BOJ said in July last year.

After more than a decade of massive bond buying for monetary easing, the BOJ held 52.6% of Japanese government bonds as of September, according to the central bank’s data. Even after the BOJ ended the stimulus program in March last year, bond traders have paid close attention to every move the BOJ makes in the market.