MNI INSIGHT: BOJ Eyes Core Bid/Cover Ratio To Cut L/T JGB Buys

By Hiroshi Inoue

     TOKYO (MNI) - The Bank of Japan will consider reducing the frequency of its

bond purchases in the benchmark 5-to-10-year sector to three times monthly from

the current four just as soon as market conditions allow, MNI understands,

although it will almost certainly pare back purchases at the shorter-end of the

curve first. 

     Before cutting the frequency, the BOJ will first likely to trim its current

purchases in the 5/10-year bucket from Y480 billion per operation to Y360

billion.

     Lowering the frequency will come despite the concerns of some board

members, who would like to maintain purchases to further increase the monetary

base and help in the achievement of the BOJ's 2% price target.

     In deciding, the focus will on the unpublished 'core' bid-to-cover ratio,

which BOJ insiders use to judge the strength of market willingness to sell JGBs

to the bank.

     Although the BOJ publish the total competitive and successful bid totals

for each operation to give an overall bid/cover level, their 'core' number,

closely watched by the markets operations department, removes what are

considered false bids -- or those placed at levels remote from prevailing market

prices simply to boost and distort the total size of competitive bids.

     --REDUCE MONTHLY TOTAL

     The BOJ is currently buying Y480 billion per operation in the 5-to-10 year

bucket, totalling Y1.92 trillion through four monthly operations, having upped

the scale from Y430 billion in March 6 when reducing the frequency from five

times monthly. 

     They would aim to keep the amount per operation at Y480 billion after

trimming the frequency, meaning a reduction in total monthly purchases to Y1.44

trillion and MNI understands the BOJ would like to drop the overall monthly

purchase to that level first via reducing the amount of each op to Y360 million.

     On May 31, the BOJ reduced the frequency of its longer-term JGB buys to

three times in June from the four in May. The BOJ will likely lower the number

of short-term JGB operations to three from four times before reducing the

frequency of 5-to-10 year purchases.

--MNI Tokyo Bureau; tel: +81 90-2175-0040; email: hiroshi.inoue@marketnews.com

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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