The Bank of Japan remains indifferent to the bond market volatility. Governor Kuroda says that the record high yield reflects the economic reality.

According to informed sources, Bank of Japan officials believe that there are multiple reasons to oppose intervention in the bond market, even if the benchmark yield reaches the highest level since 2008, and they have elaborated on the thinking behind Governor Haruhiko Kuroda's recent comments. Kuroda said on Wednesday during a parliamentary speech that he is not concerned about the recent trend of rising yields, as it reflects the market's views on the Japanese economy, inflation, and changes in overseas interest rates. He stated that the Bank of Japan overall agrees with these views. Sources state that officials are determined not to intervene in the market unless there is extreme volatility, as they are concerned that setting thresholds for traders could impact market functioning. They express that the market should determine interest rates on its own, and investors need to adjust to a market environment without central bank intervention following the end of last year's yield curve control program. Sources added that officials believe the market is functioning healthily without speculative trading disruptions. They view the recent market volatility as not exceptional compared to other global markets. These views indicate that although the Bank of Japan's official stance remains the same as before March last year when it canceled the yield curve control program stating they would intervene in case of disorderly market moves the threshold for intervention has been raised. Similar remarks made by Kuroda on Wednesday indicate that the official stance has not changed. Meanwhile, more investors believe that the terminal rate set by the Bank of Japan might be higher than previously expected, which has led to the most notable increase in yields since the Bank stopped controlling the Japanese yield curve. On Monday, the Japanese benchmark 10-year yield reached 1.575%, the highest level since 2008, and by Wednesday morning, the 20-year bond yield had also risen to a similar level. On the same day, the 30-year bond yield climbed to the highest level since 2006. Behind the scenes, officials are well aware that any direct action or hint of action would signal a threshold for traders at the time, affecting market functioning. Sources indicate that due to similar concerns about market functioning, officials believe that fixed-rate operations might be a last resort as it would send a strong signal about yield levels. Sources suggest that if the Bank of Japan decides to intervene in the bond market, they may indicate a sense of urgency through different means before taking direct action, such as changing Kuroda's tone or adjusting the monthly bond purchase plan. Despite the bond yields reaching multi-year highs, market volatility in the Japanese interest rate market remains significantly lower than other major markets due to the Bank of Japan's large-scale bond purchases and gradual policy tightening. The three-month implied volatility of 10-year overnight index swap derivatives, reflecting the volatility of the Japanese bond market, is around 50 basis points, half of the equivalent level in the US and lower than the 85 basis points in the Eurozone. Kuroda mentioned last month that the Bank of Japan would act in "special situations." Sources state that Bank of Japan officials do not have a consensus on the definition of "special situations," but a significant market collapse might prompt them to take action. The Bank of Japan still holds around half of the Japanese debt market. Sources suggest that officials will closely monitor whether financial conditions become tight or if the stability of bond yields in the market is hindered.