By Leika Kihara

TOKYO (Reuters – Prospects for tighter U.S. monetary Policy continue to drive up yields in Japan’s very long government bonds. It puts the central bank under pressure to keep its 10 year target.

The yield on the Japanese 10-year bond JGB fell back below the implicit 0.255% target that the Bank of Japan has set. This was after Monday’s rare intervention by the central bank, which offered to buy unlimited quantities of the tenor.

Investors’ attention has been drawn to BOJ’s response to investors and to how it might continue to defend the crucial 10-year target.

DIE BOJ WOHERE WOULD IT INTERVENE A NEW TIME?

BOJ is determined to prevent the yield on 10-year JGBs from exceeding 0.25%, and not increase borrowing costs. The BOJ may step in again if yields increase faster and risk exceeding the line.

WILL THE BOJ INTERVENE to CAP OTHER MATURITY YIELDS

The BOJ’s yield curve control aims to manage the curve’s shape by fixing short-term rates as well as the yield on the JGB for 10 years. The BOJ does not establish a target for any other areas.

The BOJ won’t likely intervene in order to stop yield rises for maturities other that the 10-year, except if the moves threaten to increase the yield by more than 0.25%.

The BOJ regards the steepening yield curve, which has increased the profit margins of financial institutions from investment and loans, as an attractive move for now.

WHAT’S NEXT?

The BOJ has the power to buy fixed-rate bonds for as long as it takes to stop rising borrowing costs if there is continued upward pressure on the yield of the 10-year bond.

A central bank can also choose to conduct an unscheduled operation for bond buying or increase the number of quarterly scheduled bonds purchases.

WHAT IS THE BOJ’S LEFT OF FIREPOWER?

BOJ has nearly 50% of the outstanding JGBs after decades of massive buying in order to inject money into the economy. Because of its strong market grip, the BOJ can control yields and not increase buying. It is possible for the central bank to print money however large it needs to continue buying JGBs and achieve its yield goal.

What are the CONSTRAINTS?

BOJ pursues two contradicting goals. The BOJ wants to preserve its yield limit to reduce borrowing costs. It also wants to keep yields low and not limit its efforts to revive a dormant market by its large presence.

The BOJ is likely to reduce the amount of intervening in markets. The BOJ will not increase bond purchases unless it is absolutely necessary in order to maintain the yield at 0.25% on 10-year bonds.

However, the BOJ will not be deterred from intervening to stop yields rising despite the yen’s recent weakness. It may be forced to raise yields further, however, if further declines in the yen increase import costs or draw out public criticisms of rising living costs.