BOJ moves to deter bond short selling after fresh challenge to yield control

BOJ moves to deter bond short selling after fresh challenge to yield control
FILE PHOTO: A worker holds samples of new Japanese yen banknotes at a factory of the National Printing Bureau producing Bank of Japan notes at a media event about the new notes scheduled to be introduced in 2024, in Tokyo, Japan, November 21, 2022. REUTERS/Kim Kyung-Hoon/

TOKYO : The Bank of Japan (BOJ) took steps on Thursday to deter market players from short-selling government bonds in a fresh sign of the mounting difficulties of sustaining its yield control policy, which seeks to cap long-term interest rates at 0.5 per cent.

The central bank said in a statement that it will increase the minimum fee charged to financial institutions for borrowing some 10-year Japanese government bond (JGB) notes to 1.0 per cent from 0.25 per cent starting on Feb. 27.

The higher charge will apply to the three most recently issued 10-year JGB notes, which could be excluded from the BOJ’s fixed-rate market operation under certain conditions, it said.

Under a scheme called the Securities Lending Facility (SLF), the BOJ lends out holdings of JGBs that are in short supply in the market.

The move is part of the bank’s efforts to address market distortions caused by its heavy bond buying to defend its cap on the 10-year bond yield.

“The SLF facility is intended to supply JGBs temporarily and as a supplementary measure,” the BOJ said in a statement.

“But we’ve seen massive short-selling in the market that is based on the premise of using the SLF facility on a sustained basis,” it said in explaining the hike in the higher fees.



Source: Reuters