TOKYO: There’s more than just one hedge fund betting the Bank of Japan (BoJ) will cave in and change its increasingly isolated super-easy monetary policy.

       Speculators pushed Japan’s bond futures to the brink of a trading halt Wednesday, as the central bank struggles to convince markets its pledge to cap yields at 0.25% is sustainable.

       Signals from the option market show bets on a tweak to its curve-control policy are mounting as the BoJ increases bond purchases to historic levels.

       The BoJ is faced with a growing headache in its strategy to help a stuttering economy as the rest of the world moves on to raise interest rates.

       BlueBay Asset Management is among investors betting the BoJ will crack, with chief investment officer Mark Dowding calling yield-curve control “untenable.”

       While the consensus view is that the central bank will stick with all its main policy settings when it finishes a two-day meeting today, the BoJ risks ramping up pressure on yields, accelerating a slide in the yen and exacerbating public angst over rising prices.

       “Tension is heightening considerably in markets leading up to Friday’s BoJ decision,” said Katsutoshi Inadome, a strategist at Mitsubishi UFJ Morgan Stanley Securities in Tokyo.

       “Just one week ago, this meeting was seen as a non-event. But this market development makes people wonder whether there will be some action.”

       Ten-year bond futures slumped the most since 2013 on Wednesday, with the sell-off persisting even after the BoJ ramped up its bond buying programme, announcing unlimited purchases of so-called cheapest-to-deliver 10-year bonds for yesterday and today.

       Futures fell by 2.01 yen to 145.58 in Tokyo, an amount that could have triggered a trading halt had it not been just before the market closed.

       “It’s a challenge by foreign players to yield-curve control or moves based on their views the BoJ will tweak policy,” said Inadome.

       Ten-year yen swap rates – which are popular with international funds – have surged, breaking their close relationship with domestically driven yields.

       At close to 0.60%, the former have pushed well past the central bank’s 0.25% “line in the sand” for benchmark bonds, suggesting overseas traders believe higher yields and a policy change in Japan are inevitable.

       “We think the BoJ tweaking yield-curve control at its October 2022 meeting, when it publishes its quarterly outlook report, would be one possibility,” said Takeshi Yamaguchi, chief Japan economist at Morgan Stanley MUFG Securities in Tokyo.

       “There would not likely be any signals until the last minute due to yield curve control -specific communication difficulties.”

       Yamaguchi said the BoJ may allow wider fluctuations in 10-year yields or a shortening of the target duration.

       BoJ governor Haruhiko Kuroda’s mettle is also being tested in Japanese government bonds (JGBs). A portion of the yield curve has inverted on bets he may be unable to keep capping yields with his loose monetary policy. Eight-year yields have climbed above those of the 10-year benchmark for the first time since 2000.

       A gauge of where overnight borrowing costs in the interbank market will be in two years time has pulled further away from current rates, rising to the highest since 2011 this week. Two-year forward overnight index swaps climbed to a high of 0.26% – a gap of about 20 basis points above the current rate – a sign of increased speculation that a shift in policy lies ahead.

       Options traders are betting there will be no more negative rates in Japan next year. Six-month forward six-month yen swaps have jumped above zero, having been negative since 2016, when the policy was introduced.

       Credit markets are increasingly worried that long-term rates will catch up with rising US yields, with some issuers scrapping planned sales. Corporate bond spreads have recently hit their highest in more than a year.

       “Investors would find it even harder to invest in corporate bonds with longer tenors, high-beta credit in particular,” said Kentaro Harada, chief credit analyst at SMBC Nikko Securities Inc in Tokyo.

       One of the reasons that may force the BoJ to tweak is further signs of deteriorating functioning in the bond market, Morgan Stanley MUFG’s Yamaguchi said. A gauge of volatility in JGBs has spiked this year amid the central bank intervention, while higher inflation becoming a political issue and the weakening yen are other potential catalysts, he said.

       The BoJ is “under pressure, but don’t expect capitulation yet,” Bank of America strategists including Tomonobu Yamashita wrote in a note. — Bloomberg