Bank of Japan to buy unlimited bonds

The Bank of Japan announced today that it unlimited purchases of government bonds, if necessary to keep interest rates low. These measures follow a sudden rise in government bond yields from around the world and are designed to calm investors. The promise that the central bank will buy unlimited government bonds caused a fall in yields on Japanese government bonds with maturities of two and five years.

In a speech to Japan's parliament, Bank of Japan governor Haruhiko Kuroda said he will not allow speculators from abroad to set interest rates on Japanese government bonds. By announcing that the central bank will buy unlimited loans, it is putting a floor under bond prices and guaranteeing that interest rates will remain low for the time being.

"Interest rates may have risen in the United States, but that doesn't automatically mean that we should allow Japanese rates to rise as well", according to central banker Kuroda.

Guarantee

The Bank of Japan guarantees a minimum price for government bonds. Should interest rates rise further (and the value of bonds fall), the central bank will withdraw unlimited debt from the market to defend that minimum price. The Bank of Japan hopes that its bluff attempt is enough to reassure investors and that the announcement alone is enough to calm the bond market.

In the summer of 2012, ECB President Mario Draghi managed to calm the financial markets with his infamous 'whatever it takes' speech. By announcing that he would do everything to save the euro, calm returned to the bond market and interest rates on government bonds of countries such as Spain, Italy, Portugal and Greece fell. The governor of the Bank of Japan hopes his speech will have the same effect on investors.

Bank of Japan will buy unlimited government bonds if interest rates rise