Bank of Japan’s Kuroda Faces Tough Task to Persuade Markets He Won’t

(Bloomberg) — Bank of Japan Governor Haruhiko Kuroda faces a growing challenge to convince investors that a policy pivot isn’t on the horizon following a wave of hawkish turns by global central bankers.

Kuroda continues to insist that the BOJ’s yield control framework is firmly bolted down without any tinkering under consideration given continued weakness in Japanese price growth. But he may need to take action as early as Wednesday to shore up that stance.

The rising tide of worldwide yields has reached Japan, pushing 5-year and 10-year rates to the highest levels since 2016. The moves suggest that sooner or later the central bank will have to back up its message with actions instead of words. 

“At this point, the market needs to see the BOJ affirming its easing commitment through actual steps,” said Yoshimasa Maruyama, chief market economist at SMBC Nikko Securities. “Speculation over possible policy adjustments will only ease once the BOJ jumps in to stop yield rises.”

Kuroda remains the last staunch dove at the world’s biggest central banks outside of China, after European Central Bank chief Christine Lagarde last week swiveled in the direction of tightening policy and Reserve Bank of Australia Governor Philip Lowe sketched out an interest-rate-hike scenario this year as inflation strengthens.

But Kuroda is already in his last full year at the helm of the BOJ, and investors are looking beyond his stimulus-focused stance to a future track toward possible policy normalization. 

To some degree the BOJ has been here before. In 2018, speculation of policy adjustments rocketed during a previous Federal Reserve tightening cycle. The BOJ defended its yield target range at that time right up to an announcement of adjustments, an about-turn that continues to feed ongoing chatter now.

Higher foreign ownership of Japanese bonds this time around means that more of a tussle could lie ahead as the BOJ looks to keep markets in line.

The yield on the 10-year JGB reached 0.21% on Tuesday, its highest since January 2016 and within sight of the BOJ’s ceiling of around 0.25% above its zero target. 

“I think the BOJ will refrain from taking any action until the 10-year yield reaches 0.25%,” said Ayako Sera, a market strategist at Sumitomo Mitsui (NYSE:) Trust Bank Ltd. in Tokyo. She thinks moving too soon risks overplaying the bank’s dovish position and causing an unpopular weakening of the yen.

The next watchpoint for observers of the standoff between bond traders and the BOJ comes Wednesday morning with a scheduled bond-buying operation. According to the central bank’s quarterly purchase schedule, it should swoop into the market for 425 billion yen ($3.7 billion) of JGBs in the five to 10-year range.

If the BOJ buys more it will be the first concrete action to stem the latest wave of yield gains. Like Sera, though, most analysts expect the central…