BOJ deploys funds-supply tool again as yields creep up

By Leika Kihara

TOKYO (Reuters) -The Bank of Japan said on Friday it will extend five-year loans against collateral to financial institutions, the second time it has made such an offer after ramping up the funds-supply operation this month to defend its yield control policy.

The announcement underscores the central bank’s resolve to prevent simmering market speculation of a near-term interest rate hike from pushing up bond yields too much.

The BOJ will conduct the funds-supply operation on Tuesday, under which it will offer loans with a five-year duration from Feb. 1, it said in a statement.

The amount of loans to be offered will be announced on Tuesday, it added.

The announcement came after the 10-year Japanese government bond (JGB) yield crept up near the BOJ’s 0.5% cap on Friday, partly on data showing core consumer inflation in the capital Tokyo hit a near 42-year high of 4.3% in January.

In the previous offer made on Monday, the BOJ extended five-year loans worth 3.13 trillion yen ($24.09 billion). The minimum bid interest rate was 0.110%.

At this month’s policy meeting, the BOJ amended rules for the funds-supply operation, so it can pump funds extending up to 10 years to financial institutions against collateral.

The revamped funds-supply operation has become the central bank’s new weapon to defend its yield cap, which has come under attack from investors betting that rising inflation will prod the BOJ to abandon its yield control policy.

Before the rule amendment, the funds-supplying operation was used to pump short-term funds – typically of durations up to one-year – to financial institutions.

($1 = 129.9500 yen)

(Reporting by Leika Kihara; Editing by Jacqueline Wong and Kim Coghill)