While global markets are focused on the Fed's upcoming interest rate decision, expectations that monetary policy will be more hawkish after inflation hit a 41-year high in the US caused pressure on the Bank of Japan's (BoJ) control mechanism.

The BOJ has announced that it is expanding bond purchases to keep the yield curve under the control amid rising global interest rates and repressing bond yields.

It increased its five-to-10-year bond purchases to 800 billion yen ($5.94 billion) from the 500 billion yen ($3.7 billion), after Japan's 10-year bond yield rose above 0.25%, which is at the top of the tolerance band.

"The Bank will make changes in the auction schedule and amounts of outright purchases of JGBs (Japanese Government Bonds) as needed, taking account of market conditions," it said in a statement on Tuesday.

Largest amount since start of bond purchasing program

The BOJ purchased government bonds worth 2.2 trillion yen ($16.33 billion) on Tuesday, the largest amount recorded since the bond-buying program began in 2016.

The acquisition operation for long-term bond purchases came after Japanese 30-year bond yields soared to 1.26%, another record since 2016.

The BOJ's determination to keep these yields low, along with its "dovish" stance, decision to ignore the policies of other major central banks to hike rates, and investors' focus on the Fed's possible interest rate increase caused a decline in the Japanese yen, which hit a 24-year low against the US dollar.

After the Japanese currency slumped to record lows amid the gap between Japanese and US bond yields, the dollar/yen parity stabilized at around 135 after seeing 135.6.

The yen has lost nearly 20% of its value against the US dollar since March, while the BOJ has so far resisted pressure to tighten its monetary policy, allowing the country's currency to weaken.

Also, higher imported fuel and raw material prices are putting companies in a difficult position and causing higher costs of living.

Japanese Finance Minister Shunichi Suzuki, expressed concern on the yen's rapid recent decline and said the government would coordinate appropriate action with the BoJ.

Suzuki emphasized the importance of steady movement in exchange rates as excessive volatility may harm economic and financial stability.

He added that the government would carefully monitor movements in the money market and their impact on the economy and prices.

Haruhiko Kuroda, the governor of the BoJ, said on Monday that the bank had not fully recovered from the damages inflicted by the coronavirus pandemic and was determined to keep interest rates at ultra-low levels to support the economy.

Underlining that the Japanese economy was still trying to recuperate from the pandemic, Kuroda said uncertainty remained on the impact of the Ukraine war on the economy and prices in Japan.

Admitting that the recent sharp declines in the yen were undesirable, Kuroda emphasized that they were not good for the economy.

Analysts have emphasized that the BoJ does not target exchange rates while guiding its monetary policy and continues to support the economy with ultra-loose policies.

Suleyman Mete Ozbalaban, an Asian markets expert, said Japan's total short-term and long-term bond debt amounted to 1.2 quadrillion yen ($8.9 trillion).

Ozbalaban noted that 43.4% of these bonds were purchased by the Japanese Central Bank, and 18.1% were purchased by large insurance and pension funds and 16% by banks.

He said that foreigners' share in the bond market was 14.3%. "As the interest rates in the country are very low, they borrow from Japan and invest in US bonds, this lowers the value of the Japanese yen."

"As Japan keeps interest rates low, the interest gap with the US widens,

"One of the factors that determines the exchange rates is the interest difference between countries. As the interest rate difference grows, selling pressure emerges and the Japanese yen falls to historically low levels," he said.

The BoJ is not expected to make any changes to its interest rates and monetary policy in its two-day monetary policy meeting that will end on Friday.

In Japan, the core Consumer Price Index exceeded the 2% target in April for the first time in seven years, hitting 2.5% in the highest reading since December 1991.

The increase in April was largely due to fuel and food costs./aa