Today, the Bank of Japan announced the purchase of a smaller number of government bonds, reducing the size of debt purchases for the first time since late December.

Japanese treasury yields rose after the news was released. The yield on Japan's ten-year treasury bonds rose to 0.932%, close to the ten-year high of 0.97% set in November last year.

The two-year treasury bond yield rose 0.5 basis points to 0.32%, the highest level since July 2009.

The yen exchange rate briefly increased, but soon fell again, and is currently at 155.76.

Reduced the size of debt purchases for the first time

The Bank of Japan said it will buy 425 billion yen of 5-10 year bonds, while it purchased 475.5 billion yen of related bonds on April 24.

Although the number of purchases is still within the plan for this quarter, it is worth noting that this is the first time since late December that the Bank of Japan has reduced the size of debt purchases.

In the minutes of the previous April meeting, the Bank of Japan mentioned that it will indicate its intention to reduce debt purchases at some point and begin downsizing at the right time.

In response, Takahiro Otsuka, a senior fixed income strategist at Mitsubishi UFJ Morgan Stanley, commented: “It is surprising that the Bank of Japan is cutting the scale of debt purchases, which may help increase yields. With the recent depreciation of the yen, the bond market is likely to experience greater volatility.”

Shoki Omori, chief strategist at Tokyo Mizuho Securities, believes that “the Bank of Japan appears to be facing pressure from the government” and needs to take action to deal with the depreciation of the yen and the loose financial situation.

“However, the impact will be limited because investors have been prepared for this since the Bank of Japan's April policy meeting minutes were released,” he said.

The depreciation of the yen affects the return on investment in Japanese stocks

Previously, after the yen exchange rate fell to a 34-year low, the Japanese government suspected that it was interfering with the yen exchange rate, but the market did not buy it. The yen recently returned to an upward depreciation trend after a short period of appreciation.

Meanwhile, Wall Street is also generally bearish on the yen, believing that it may fall below 160 again.

The depreciation of the yen will not only have a huge impact on Japan's inflation and economic growth, but will also affect international capital flows, causing fluctuations in the Japanese stock market and bond market.

The weakening yen affected the return on investing in Japanese stocks. The Nikkei 225 Index rose 14% this year, outperforming its global peers.

However, based on the US dollar, after the depreciation of the yen, the return on investment in the Nikkei 225 index shrank to slightly above 3%, far lower than the 9.5% increase in the S&P 500 index and the 11% return on the US dollar in the Hang Seng Index.

Yue Bamba, BlackRock's head of active investment in Japan, said: “If the currency continues to weaken, it will become more difficult to invest in Japanese stocks. When you talk about Japan with global investors, forex is definitely the first thing everyone thinks about.”

He believes that the future trend of the yen depends more on the actions of the Federal Reserve than the actions of the Bank of Japan. If the Federal Reserve does not cut interest rates, the dollar may gradually move towards 170 against the yen. If interest rates were to be cut, the 130-135 level would be “completely imaginable.”

Regarding the current level of the yen exchange rate, Bamba commented that it was “undervalued.” The fair value of yen is “much higher” than the current level, and can “easily reach 130.”

He expects that if the yen appreciates above 150, overseas investors will return to the market with confidence.

Bamba anticipates that the Bank of Japan may raise interest rates in July or October and reduce purchases of Japanese treasury bonds until then. Bank of Japan Governor Ueda Kazuo's attitude towards currency has clearly changed recently, and this is a time when normalization can be achieved to a certain extent ahead of schedule.

Furthermore, Pioneer Group expects the Bank of Japan's benchmark interest rate to rise to 0.75% from the current 0%-0.1% by the end of the year. Pacific Asset Management expects the Bank of Japan to raise interest rates three times.