The Bank of Japan faces an especially acute version of a dilemma that confronts many central banks: keep interest rates low and watch the currency crash, or raise them and watch the economy crash. From Tyler Durden at zerohedge.com:
After sliding relentlessly for much of the past month on expectations that the BOJ will be the “odd” central bank out, refusing to join its developed peers in tightening financial conditions, and the USDJPY rising as high as 122.44 earlier (from 115 three weeks ago), the yen jumped on Friday morning in Japan, after the 10Y JGB crossed a critical resistance level without intervention from Kuroda.
Entering the final trading day of the week, with 10Y JGB yields on the verge of rising above 0.23%, traders were bracing for another massive bond market intervention by the BOJ. As Bloomberg’s Wes Goodman put it, “there’s a good chance the Bank of Japan will buy bonds as soon as Friday to curb the advance in yields. JGB ten-year rates are climbing in tandem with yields globally, rising to 0.23%.”
As shown in the chart below, when JGBs hit that level last month, the central bank responded with one of its an unlimited fixed-rate purchases, in effect putting a hard stop to further declines in JGBs.