MNI INSIGHT: BOJ May Cut 5-10 Yr JGB Frequency; Up Per Op Size

By Hiroshi Inoue

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

of its purchases of Japanese government bonds with a remaining life of 5 to 10

years to four times monthly from the current five as early as from next month,

MNI understands.

     However, the BOJ will exercise caution when considering the timing of

reducing the frequency of its purchases of those JGBs, as they have set the

10-year yield as a policy target and because the risk of global financial market

volatility persists.

     The BOJ has already reduced the frequency of its purchases of medium- and

super long-term JGBs to four times monthly from five.

     The BOJ is due to publish its guideline for February JGB buying operations

on Jan. 31.

     --ESTABLISHED ENVIRONMENT 

     In December, the BOJ reduced the scale of its purchases in the 5 to 10

years to Y430 billion from Y450 billion per operation.

     That move is interpreted to mean that the necessary environment has been

established so that the BOJ can reduce the frequency of 'benchmark' operations

to four times from five times.

     However, BOJ officials are focused on how the risk of volatile financial

markets evolves and they are examining whether the reduction of the operation

will add unnecessary noise to bond markets.

     --LITTLE OVERALL CHANGE

     If the BOJ reduced the frequency of JGB bond buying with a remaining life

of 5 to 10 years to four times monthly, the scale of its purchase per operation

is expected to be increased to around Y500 billion from the recent Y430 billion.

     At that expected level, the BOJ will buy a total of Y2 trillion monthly,

which compares to the current Y2.15 trillion monthly, with the difference

between four- and five monthly operations minimal.

     JGBs players took the BOJ's decision to reduce the frequency of its medium-

and super long-term JGB purchases to four times from five in their stride,

without any undue market confusion. 

     The drop in those bond yields caused by tight bond supply-demand condition

has enabled the BOJ to lower the scale of its bond buying and the frequency of

its operations.

     --CURVE CONTROL

     Under the yield curve control framework adopted in September 2016, the BOJ

will keep the target for the overnight interest rate at -0.1% and the 10-year

JGB rate "around zero percent."

     The BOJ will continue buying JGBs to stabilize the 10-year yield "around

zero percent" but it will also allow the long-term interest rate to "move upward

and downward to some extend" in line with the changes in economic growth and

inflation.

     In July, 2018, the bank "strengthened" it operating framework, allowing a

wider trading range of +0.2% to -0.2% for the 10-year Japanese government bond

yield, double the previous, unofficial range of +0.1% to -0.1%.

--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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