*
BOJ buys record $182 billion worth of bonds in January -
data
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Wary of distortions, BOJ resorting to new tools to cap
yields
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Analysts betting on tweak to yield control policy in April
(Adds context on funds-supply tool, BOJ policy outlook)
By Leika Kihara and Takahiko Wada
TOKYO, Feb 1 (Reuters) - The Bank of Japan bought a
record $182 billion worth of government bonds in January, data
showed on Wednesday, underscoring its resolve to defend its
yield cap from attack by investors betting on a near-term
interest rate hike.
The massive buying highlights the increasing difficulty the
central bank faces in sustaining its yield control policy, as
inflation perks up well above its 2% inflation target.
With its heavy-handed intervention drying up bond market
liquidity, the BOJ is increasingly relying on a new funds-supply
tool to keep the 10-year yield from breaching its 0.50% ceiling.
Some analysts, however, see such steps as a stop-gap effort
to buy time until a new BOJ governor, who succeeds incumbent
Haruhiko Kuroda in April, begins deliberations to revamp yield
curve control (YCC).
"The BOJ is trying all available means to defend YCC but in
doing so is increasing, not reducing, distortions in the bond
market," said Naomi Muguruma, senior market economist at
Mitsubishi UFJ Morgan Stanley Securities.
"It's become a widely shared view in the market that YCC
won't be sustained under the new BOJ leadership. It would be a
huge surprise if the BOJ doesn't tweak YCC in April," she said.
The BOJ's bond buying in January, at 23.69 trillion yen
($182 billion), was the biggest amount on record and exceeded
the previous high of 16.2 trillion yen marked in June 2022,
central bank data showed.
Under yield curve control, the BOJ guides short-term
interest rates at -0.1% and the 10-year bond yield around 0%.
The BOJ's decision in December to widen the allowance band
around the 10-year yield target heightened market expectations
of a near-term rate hike, forcing the bank to ramp up bond
buying to defend the newly set 0.5% cap for the 10-year yield.
Under pressure to iron out market distortions caused by its
heavy bond buying, the BOJ remodelled in January a funds-supply
operation into a tool to prevent yields from rising too much.
On Tuesday, the BOJ pumped five-year loans worth 1 trillion
yen against collateral to financial institutions, in its second
such operation with the remodelled tool.
While the BOJ has so far offered only two- and five-year
loans, the BOJ can offer funds as long as 10 years with the
revamped funds-supply operation.
"Depending on market conditions, an offer of long-term funds
such as 10-year loans cannot be ruled out," a source familiar
with the BOJ's thinking said, a view echoed by another source.
While offering such long-term loans will be a fresh sign of
the BOJ's determination to maintain YCC, the impact of the move
on bond yields may be short-lived as markets continue to price
in the chance of a near-term rate hike, some analysts say.
The 10-year bond yield stood at 0.480% on
Wednesday, remaining close to the BOJ's 0.5% cap.
The government is expected to present its nominees for the
new BOJ governor and two deputies to parliament later this
month. Kuroda's term ends on April 8, and that of his two
deputies on March 19.
Kuroda chairs his final BOJ policy meeting on March 9-10.
His successor's first meeting will be held on April 27-28 with
career central bankers Masayoshi Amamiya and Hiroshi Nakaso seen
as strong contenders.
($1 = 130.1800 yen)
(Reporting by Leika Kihara and Takahiko Wada, additional
reporting by Kantaro Komiya;
Editing by Shri Navaratnam, Uttaresh.V and Christian
Schmollinger)