MNI INSIGHT: BOJ Won't Mask JGB Op Schedule While Key Presence

--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

operation.

     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.

     --LOWER BUCKET FREQUENCIES

     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

costs.    

     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.

     --RANGE FLEXIBILITY

     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: les.commons@marketnews.com

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