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--BOJ Concerned Opaque Bond Buying Program Will Hit JGB Liquidity
By Hiroshi Inoue
     TOKYO (MNI) - In the ongoing fight to improve market functionality, the
Bank of Japan will continue publishing a schedule of planned Japanese government
bond buying operations unless the scale of its bond buying drops markedly and
the BOJ's presence in JGB market is lowered, MNI understands.
     However, the BOJ still stands ready to reduce the scale of its JGB buying
and lower its market presence, if bond market functioning warrants it to do so.
     The BOJ is concerned that without a formal schedule for JGB operations, JGB
players will sit on the sidelines for a large part of the morning session,
awaiting signals from the central bank at 1010 local time as to whether, and at
what scale, there will be an operation that day. 
     That, inevitably, means greatly reduced liquidity levels in the market
around the times of early morning major economic data releases -- normally times
of increased activity in bond markets.
     As long as the BOJ's presence remains high in JGB markets, stopping the
schedule  of bond buying operation will discourage JGB players from trading
bonds before  1010 JST (0110 GMT), when the BOJ usually conducts its bond buying
     However, the BOJ is ready to further reduce the scale of its JGB buying,
including longer-end bonds, if market conditions warrant it to do so, but
officials see no need to remove transparency from its schedule of JGB buying
operation at present.
     The BOJ has reduced the frequency of its purchases of JGBs with a remaining
life of 1 to 3 years and 3 to 5 years to four times for each bucket in November,
down from five in each through October.
     The decision was due to the drop in medium-term bond yields caused by
Japanese banks' stronger demand for those bonds, mainly seen for JGBs with a
remaining life of about 2 years, the BOJ views.
     Japanese banks are buying Treasury discount bills to gather collateral but
they are having difficulty in buying necessary Treasury discount bills, as
foreign banks are increasing their purchases based on their cheaper yen-funding
     The BOJ remains cautious about reducing the frequency of its purchase of
JGBs with a remaining life of 5 to 10 years and about lowering the scale of
those bond buying operations, as the BOJ sets 10-year interest rate as one of
the policy targets.
     Under its current framework, the BOJ has been trying to stabilize the
10-year JGB yield, the benchmark for long-term borrowing costs, at around zero
percent and keep the official overnight interest rate at -0.1%.
     In July, the BOJ has strengthened its framework, allowing a wider trading
range of +0.2% to -0.2% for the 10-year bond yield, about double the previous,
unofficial range of +0.1% to -0.1%.
     However, this doesn't mean that BOJ officials who run the daily operations
won't tolerate the 10-year bond yield rising above +0.2%, unless the 10-year
bond yield deviates notably from "around doubling from the previous range of
+0.1% to -0.1%."
--MNI London Bureau; tel: +44 203-586-2225; email:
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