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BOJ buys up newly issued JGBs in fight against bond vigilantes
As the Bank of Japan pushes back against foreign speculators shorting government bonds, it is having to buy up almost all newly issued 10-year instruments to keep the benchmark yield within its target range, raising questions about the current easing policy. The shocking figure was announced on Nov. 2. The BOJ's holdings of the 368th issuance of 10-year Japanese government bonds as of the end of October exceeded the amount actually issued. "I started to think that even the BOJ can reach its limits in government bond purchases," a bond trader said. The seeming mathematical paradox arose because of the BOJ's practice of lending purchased bonds to banks, (But don't talk about our version of it https://www.newyorkfed.org/markets/desk-operations/securities-lending )which in turn unload them into the secondary market-The BOJ then could end up buying these bonds in market operations, resulting in double-booking of the same instruments. The BOJ uses a yield curve control policy to guide interest rates. When the yield on 10-year bonds looks set to go beyond the 0.25% upper limit, it conducts a market operation to buy an unlimited amount of government bonds to keep the yield in check. The 368th government bonds are the most recent offering. The BOJ is thus buying them up in market operations. At the same time, foreign players are shorting the instruments by borrowing them from banks, betting that the BOJ will not be able to continue with its yield curve control now that Japan's inflation has reached 3%.
In a vicious circle, the central bank then has kept up with its purchases of 368th JGBs from the market, and its bond ownership increased rapidly as a result. Because the Ministry of Finance unloaded another batch of the 368th bonds in an auction on Nov. 1, the BOJ's holdings immediately fell below 100%. But the market fears that the BOJ may be forced to keep buying the 368th bonds even after its holdings exceed 100%. New auctions for the 368th issuance will end on Dec. 1, so if short selling by foreigners continues after that, the BOJ will have to keep buying them. This could drastically reduce the amount of the instruments in circulation, wreaking havoc on interest rates and possibly on the currency market, some market observers fear. Investors who have shorted the 368th bonds must buy them back on the market and return them by a deadline. If they cannot, they will have to keep paying the borrowing fee to lenders, incurring losses. Despite all this, a market insider revealed that the BOJ wanted to hide the fact that its holdings of the 368th bonds exceeded 100% in late October. The BOJ bought 23 trillion yen ($164 billion) of JGBs in September and October, matching the previous peak set in June and July, signaling that massive purchases are needed to hold down interest rates. The BOJ could in fact face the limits in the amount of bonds it can purchase. This, in turn, could spur short sellers to step up the pressure.
https://asia.nikkei.com/Business/Markets/Bonds/BOJ-buys-up-newly-issued-JGBs-in-fight-against-bond-vigilantes