Goldman: BoJ Softly Signals Reduced Mkt Presence, More Yield Flexibility

Goldman Sachs note that "the BoJ announced reductions to JGB buying in several maturity buckets in its new schedule for bond buying operations. The Bank also shifted to a quarterly purchase schedule (from monthly), likely aimed at increasing transparency and clarity around its purchase plans. While we would avoid drawing too much of a signal from one schedule, these changes appear to suggest the Bank is willing to allow a bit more movement in JGB yields and tolerate steeper long-end curves. We view this as consistent with the messaging from the March policy review that the Bank is aware of the impact of its presence in the bond market and is comfortable allowing yields to trade somewhat more freely. JGB yields have participated in the recent drift lower in yields globally, but we remain of the view that the backdrop of a common vaccine-led recovery should bias ultra-long end yields higher over time. While not very impactful on its own, the overall low level of purchases in the long-end sector suggests that this pullback may be an incremental tailwind to long-end JGBs. However, we would caution that investor demand could limit upward pressure at the long end - earlier this year, we noted that some Japanese life insurers indicated some intention to add to domestic longer-maturity JGBs holdings as yield levels became increasingly compelling, which could dampen any sharp upward movement in longer term yields."