Bank of Japan acts to stem rising JGB yields Japan's five-year borrowing costs rose above Germany's on Wednesday for the first time in more than 20 years, after liquidity concerns caused a fresh spike in JGB yields. During the Asian trading session, yields on five-year JGBs rose as high as 0.45 per cent, compared with 0.40 per cent for Bunds with similar duration. Data compiled by Bloomberg showed this had not happened since at least the 1980s. If the move proves to be sustained, both local and international investors could now look to JGBs in the global hunt for yield - a swift reversal of fortunes for Japanese debt. "[It's] hard to see why any Japanese investors would want to buy Bunds instead of JGBs at this level, especially considering the yen depreciation," said Patrick Perret-Green, macro strategist at Mint Partners, in a note to clients. Conversely, for those in global bond funds, switching a bit into rarely touched JGBs doesn't seem like a bad idea. The sharp rise in government bond yields also prompted the Bank of Japan to step in on Wednesday to calm the market. The BoJ will pump Y2.8tn ($28bn) into the money market this Friday to "address the rapid increase in longer-term interest rates," said a bank official. The central bank conducted a similar-sized operation over a five-day period in April. Earlier in the day, yields on 10-year Japanese government bonds (JGBs) rose for the fourth straight session, briefly reaching 0.92 per cent - the highest level since April 2012. But yields fell after the BoJ move, dipping to 0.866 per cent by 4pm in Tokyo. Yields on two-year JGBs have also risen sharply in recent days, hitting 0.14 per cent on Wednesday for the first time since 2011, having been at just 0.042 per cent at the start of April. The BoJ official said the central bank was surprised that rates in the one-to-two year band had jumped, and that such moves were more likely to be influenced by "misunderstandings" about the BoJ's commitment to keeping the market flooded with liquidity, rather than changes to inflation expectations. As part of a broader plan to tackle long-entrenched deflation, the BoJ in April promised to buy about Y8tn of JGBs per month, equivalent to roughly 70 per cent of new issuance. That has in turn crimped liquidity in the bond market, said Noriatsu Tanji, Japan credit strategist at Barclays, making bond yields more sensitive to newsflow - such as US economic data or changes in US Treasury yields - than before. Mr Noriatsu added that while the BoJ operation was bigger than previous similar moves, it did not mark a "big change" in terms of policy. Despite the recent spate of JGB selling, Japanese borrowing costs remain among the lowest in the world. However, the BoJ is likely to keep a close eye on the market, said analysts at BNY Mellon, due to previous experience, such as the rapid sell-off in 2003 when yields jumped from 0.5 per cent to 1.6 per cent in less than three months. Concerns about the recent sell-off in government debt prompted Japanese prime minister Shinzo Abe to tell a parliamentary session that the government was watching the market closely, and that he expected the BoJ to "respond appropriately." The volatility in the bond market failed to dent sentiment for equities - which rose strongly once again, continuing a rally now six months long. After an increase of 2.3 per cent on the day, the Nikkei 225 closed at 15,096 - its first close above 15,000 since December 2007. Meanwhile the yen also fell against the US dollar, reaching Y102.4. Analysts at Société Générale said in a note to clients that equities were likely to lose some steam, even with further currency weakness. Our models show that the equity market is already pricing in a level close to Y110 for the yen, and in our opinion, the Nikkei rally is due for a breather. Additional reporting by Jonathan Soble in Tokyo.