MNI INTERVIEW: June Cut To JGB Buys Possible For BOJ-Sakurai

The Bank of Japan could reduce its purchases of government bonds from about JPY6 trillion per month to around JPY5 trillion by as early as June but it is likely to keep its policy interest rate unchanged at a range of zero percent to 0.1% until at least July given the contraction in first quarter GDP and the lack of immediate justification for a hike from price data, a former BOJ board member told MNI.

Even as the BOJ lowers the scale of JGB buying, stepping back in order to allow markets to determine yields, it will still pledge to continue to buy bonds in a flexible manner in order to curb any surges in long-term interest rates, Makoto Sakurai said in an interview.

The chances that the BOJ, which has made it clear that it will not much reduce its overall JGB holdings, makes any sharp reduction in its purchases, are almost non-existent, Sakurai said, adding that there should be little effect on the economy from changes to its balance sheet, even if long-term yields temporarily rise.

The BOJ is likely to announce a reduction in the scale of bond purchases to about JPY5 trillion a month in its policy statement, though there is a lower chance that it could simply delete the existing reference to about JPY6 trillion and leave the amount of purchases ambiguous, the former board member said.

“But that would appear very unusual, and could destabilise bond markets, so it is unlikely,” he added.

JUNE TANKAN

As MNI has reported, the BOJ is currently concerned that any move to reduce bond purchases might be interpreted by markets as an attempt to support the yen, and that it is likely to wait until foreign exchange markets are stable before doing so. (MNI POLICY: BOJ Wants Stable FX Market To Cut JGB Buying)

Strong corporate price-setting data in the June Tankan survey, summer bonuses, and the risk of higher inflation could prompt the BOJ to consider raising the policy interest rate to 0.25% by July, according to Sakurai, but he noted that first quarter’s 2% annualised decline in GDP, while caused by temporary factors, could make this more difficult.

Sakurai told MNI in February the BOJ would end its easy policy settings in March. (See MNI INTERVIEW: March Action Chance Rises - Ex-BOJ Sakurai)

“If the BOJ waits until September or October, the bank can ascertain various materials to justify rate hikes. It is a natural view. But the bank will be able to judge the outlook for prices in July based on available economic data at that time,” he said.

BOJ officials are more focused on the second-round inflationary effects of the weakening yen than previously, said Sakurai, pointing to remarks by Governor Kazuo Ueda.

Import prices rose on a yen basis for a third straight month in April, indicating that consumer price inflation will not fall as much as the BOJ has predicted later this year, Sakurai noted, adding that the BOJ board’s median forecast for core CPI this fiscal year will be revised up from April’s 2.8%, making it easier to justify rate hikes.