By Leika Kihara

TOKYO, Reuters – The Bank of Japan is not likely to adjust its yield target due to a steady increase in long-term rates. However, it has other options to reduce borrowing costs if necessary. Sources familiar with Bank’s thinking say that.

As rising interest rates cause speculation to abound in markets, there is a lot of market activity.

Three sources tell Reuters that while the 10 year yield is below the BOJ’s implicit 0.25% ceiling, policymakers don’t see much need to take drastic measures to lower yields.

Sources said the “10-year yield” is still within the BOJ’s target range. According to another source, “Recent moves shouldn’t be a cause for alarm.”

On Monday, the benchmark JGB 10-year yield hit 0.155%, which is the highest since six-years ago when the BOJ began its negative rate policy. This was despite repeated assurances from the BOJ that it would not be in a hurry to tighten monetary policies.

The 10-year yield fell to 0.175% Tuesday. However, the yield curve became steeper as the super-long bond yields reached multi-year records.

When the BOJ reviewed its policy framework last month to deal with the increasing costs of extended easing, it sought a steeper yield curve.

The BOJ stated in its review that it will allow 10-year yields to fluctuate 25 basis points around its 0% target, as part of market-driven yields.

To defend its target, the BOJ may offer unlimited bonds for purchase if yields increase too much.

A third source stated that the BOJ had many tools available to counter rising yields if necessary.

According to sources, BOJ is using market operations tools for now to avoid an unwanted spike in yields, rather than tweaking the YCC target.

Officials at the BOJ haven’t ruled out targeting yields with shorter dates. But, Governor Haruhikokuroda said that any such action would be possible only if conditions allow for the discussion of an outright withdrawal from central bank’s loose monetary policy.

The International Monetary Fund also urged the BOJ not to set JGB yields shorter than they are now, but it stressed the need to wait.

Takahide Kuchi, former BOJ member said: “As major central banks consider rate increases, the BOJ is likely to follow suit at some time.”

The BOJ is going to be cautious with the future outlook and will take plenty of time before making any moves.