By BLOOMBERG

TOKYO • The Bank of Japan (BoJ) is showing just what it means by being flexible with bond purchases.

The central bank unexpectedly offered to buy ¥400 billion (RM14.8 billion) of five-to-10 year bonds yesterday to stem a sell-off that saw the 10-year yield touch an 18-month high of 0.145% earlier in the day.

Traders have been testing the limits of the BoJ’s patience since it said on Tuesday it would allow the yield to go as high as 0.2%.

The operation was all the more surprising as the BoJ had said it would avoid debt purchases on the day that the government sells securities of the same maturity. It also marked a shift away from the central bank’s usual strategy of conducting a fixed-rate unlimited bond-buying operation. A sale of 10-year bonds auction earlier yesterday drew a tepid response from investors.

“The BoJ needed to slow the pace of advance in the 10-year yield, but probably wanted to wait until it reached 0.2% to step in with a fixedrate operation,” says Takenobu Nakashima, senior rates strategist at Nomura Securities Co in Tokyo.

“The move suggests more similar operations may come.”

Governor Haruhiko Kuroda’s tolerance for wider fluctuations in the yield has shattered the calm in Japan’s market, with 10-year government debt futures sliding by the most in almost two years on Wednesday — a move that prompted an emergency margin call from the clearing house. Repercussions are being felt far beyond Japan’s shores, with yields in the US and Germany rising.

The BoJ accepted ¥400.3 billion of bids at yesterday’s operation, after having received ¥1.27 trillion in total, it said in a statement. Japan’s 10-year yield reversed its advance and was down 0.5 basis point (bp) at 0.115% as of 4:50pm in Tokyo yesterday. It climbed six bps on Wednesday.

Even so, analysts said the market will be keen to push toward the 0.2% mark. That means the BoJ may be forced to conduct a fixed-rate operation, adding to the three it held in the week before its policy decision on July 31.

“The market will want to test the BoJ again to see if the benchmark 10-year bond yield can rise to 0.2%,” said Hidenori Suezawa, chief bond strategist at SMBC Nikko Securities Inc in Tokyo. “The BoJ acted this way yesterday to let the market know it can move very flexibly.”

The immediate focus shifts to the central bank’s regular bond-purchase operation today, where it is scheduled to buy debt with maturities of five-to-10 years, 10-to-25 years and that due in more than 25 years.

The BoJ has been conducting “stealth tapering” by slowly cutting bond purchases over time. It added slightly less than ¥50 trillion worth of government debt to its balance sheet in the year through March, much lower than its publicly-stated target of expanding the monetary base by ¥80 trillion annually.