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Needle Still Points North

By Hiroshi Inoue
     TOKYO (MNI) - The Bank of Japan stands ready to reduce further the amount
of its purchases of Japanese government bonds with a remaining life of 5- to
10-year if market conditions -- especially the yen exchange rate -- allow, MNI
     Earlier Friday, the BOJ lowered the size of its purchases of long-term JGBS
to Y410 billion, a level last seen in early January this year, from Y440
     The BOJ judged it necessary to cut the size of its long-term bond buying
Friday to address the drop in bond yields caused by a combination of investors'
risk-off sentiment and continued tight supply-demand conditions.
     If the BOJ had not addressed the drop in bond yields, officials were
concerned the central bank could have faced a situation where is would be unable
to control yields along the JGB curve.
     The BOJ wants to slow the rise in its JGB holdings over time to make an
eventual unwinding of its aggressive easing policy smoother but is being extra
careful to ensure that smaller JGB purchases do not ignite a rise in the yen
exchange rate.
     Before the operation Friday, BOJ officials were worried that lowering the
scale of its JGB buying might prompt yen buying. But the BOJ's decision had
little impact on the dollar-yen exchange rate, which stood around Y109.61 in
early afternoon Asian trading, virtually unchanged from the level seen in early
Asian trade.
     The 10-year JGB yield fell to 0.020% Thursday, the lowest level since May
2, prompting the BOJ to cut long-term JGB purchases Friday. Under its yield
curve control policy, the BOJ is targeting a 10-year yield of around zero
     After the operation Friday, 10-year bonds traded at 0.020% and then fell to
0.015%  in Friday afternoon trading.
     BOJ officials don't expect JGB yields to continue falling because bond
players are cautious about buying bonds at very low yields. But the officials
also think it takes time for the impact of lowering the scale of its bond buying
to impact supply-demand conditions.
     The BOJ increased the scale of its purchases in the 5- to 10-year zone in
early July after the 10-year yield rose to 0.105%, well above the BOJ's target.
It raised the per-operation purchase amount to Y500 billion on July 7 from the
Y450 billion level that had been in place since Jan. 27.
     The BOJ cut its long-term JGB buying to Y470 billion on July 24 and to Y440
billion on Aug. 16 due to the gradual drop in bond yields.
     On Jan. 27, the scale of those bond buying was increased to Y450 billion
from Y410 billion earlier in the month. 
--MNI Tokyo Bureau; tel: +81 90-2175-0040; email:
--MNI BEIJING Bureau; +1 202-371-2121; email:
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