The central bank said in a statement that it will increase the minimum fee charged to financial institutions for borrowing some 10-year Japanese government bond (JGB) notes to 1.0% from 0.25% starting from Feb. 27.
The higher charge will apply to the three most recently issued 10-year JGB notes, which could be excluded from the BOJ's fixed-rate market operation under certain conditions, it said.
Under a scheme called the Securities Lending Facility (SLF), the BOJ lends out holdings of JGBs that are in short supply in the market.
The move is part of the bank's efforts to address market distortions caused by its heavy bond buying to defend its cap on the 10-year bond yield.
"The SLF facility is intended to supply JGBs temporarily and as a supplementary measure," the BOJ said in a statement.
"But we've seen massive short-selling in the market that is based on the premise of using the SLF facility on a sustained basis," it said in explaining the hike in the higher fees.
Under attack from market players betting on a near-term interest rate hike, the BOJ has been forced to ramp up bond buying to defend an implicit 0.5% cap set for the 10-year bond yield under its yield curve control (YCC) policy.
Its heavy-handed intervention has caused distortions in the shape of the yield curve, heightening market expectations the central bank will have to abandon YCC under a new governor who will succeed dovish incumbent Haruhiko Kuroda on April 9.
"Put simply, it's an attempt to prevent investors from using the BOJ's facility to short-sell JGBs," Naomi Muguruma, senior market economist at Mitsubishi UFJ Morgan Stanley Securities, said on the steps announced on Thursday.
"The fact the BOJ had to do this is a sign it's struggling to maintain YCC," she said.
(Reporting by Kantaro Komiya and Leika Kihara, Additional reporting by Takahiko Wada and Tetsushi Kajimoto; Editing by Raissa Kasolowsky, Tomasz Janowski and Kim Coghill)
By Kantaro Komiya and Leika Kihara
