The widening of the tolerance band around the BoJ’s target for 10-year yields announced on Tuesday aims to improve bond market functioning. But if this week is any guide, that purpose remains out of reach as the Bank ended up buying the second-most bonds on record. And while 10-year yields have dropped back below the 0.5% ceiling after briefly approaching it earlier this week, the continued acceleration in inflation will only intensify speculation that the Bank will tighten policy in earnest. Even though we don’t expect that to happen, the new ceiling will probably be tested before long.
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