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The Bank of Japan’s governor has warned that yields on Japanese government debt were rising “rapidly” and that the central bank might increase its bond-buying operations, underlining concern over market movements after a heavy sell-off this week.
Kazuo Ueda’s comments on Friday triggered an hour of extreme volatility in currency markets. The yen initially fell 0.5 per cent before surging as much as 0.7 per cent.
Traders said the abrupt move appeared to have been triggered by rumours that Japan’s finance ministry had conducted a “rate check”, a discreet survey of market participants that usually precedes direct intervention.
Ueda’s remarks came after the BoJ decided to keep interest rates steady at around 0.75 per cent but signalled that it was likely to continue raising interest rates in 2026 as inflation and wages continue to rise.
That decision was widely expected but the ongoing ructions in bond and currency markets come against the backdrop of a snap general election called by Prime Minister Sanae Takaichi.
Yields on long-dated JGBs surged to record highs earlier this week, while the yen on Friday neared an 18-month low against the dollar, and reached an all-time low against the euro.
The prospect of increased JGB buying by the BoJ would, in theory, push yields lower and also create downward pressure on the yen. But around the time that London began trading, the yen abruptly reversed course, jumping from ¥159.13 to ¥157.36 per dollar in the space of a few minutes. It later settled at ¥157.45 by late afternoon in London.
“The yen jumped on rumours of a rate check. These are very, very volatile times in the market, so even that can move the currency very quickly,” said one Tokyo-based FX trader.
Japan’s parliament was officially dissolved on Friday, opening what will be the country’s shortest ever general election campaign period ahead of voting on February 8.
The suddenness of the election, combined with concerns that a clear Takaichi majority will become a mandate for fiscal expansion, has triggered a series of huge sell-offs in long-dated JGBs.
In a speech on Monday announcing the snap election, Takaichi stunned debt markets by declaring her plans for a two-year suspension of the 8 per cent consumption tax on food.
On Friday, Ueda acknowledged the recent turmoil in JGB markets and said the central bank would step into the bond market if necessary.
“We will conduct nimble market operations to respond to irregular moves,” said Ueda, echoing pledges made this week by Japan’s finance minister, Satsuki Katayama, that authorities stood ready to intervene in currency markets to support the yen.
Yields on long-dated JGBs surged to record highs earlier this week amid concerns that Japan’s fiscal position will be stretched by Takaichi’s anti-austerity, pro-growth spending plans. The yield on the benchmark 10-year JGB remains around its highest level since 1999, at 2.26 per cent.
“Regarding the pace of long-term interest rate increases — whether it is fast or too fast, and whether it warrants flexible operations — we will make judgments while closely co-ordinating with the government and carefully monitoring the situation,” said Ueda.
Asked about the proposed two-year suspension of consumption tax on food, which would cost the government around ¥5tn, Ueda said that the policy had not been decided yet and that it was not possible at this stage to determine an impact.
One of the BoJ’s nine-member policy committee voted for an immediate rate increase, prompting market speculation that there could be momentum behind a move to raise rates to 1 per cent as early as April.
The BoJ raised its forecasts for consumer price inflation, excluding fresh food and energy, for the fiscal year ending in March and for the two subsequent fiscal years.
“This was a slightly hawkish message,” said Frederic Neumann, chief Asia economist at HSBC. “Raising the inflation forecasts shows they are confident that inflation is settling around target. This demonstrated confidence in the outlook and implies more rate hikes.”
Additional reporting by Ian Smith