MNI INTERVIEW2: BOJ Should Cut JGBs By JPY470 Trln – Yamamoto
MNI (TOKYO) - The Bank of Japan should reduce its government bond holdings by JPY470 trillion to about JPY120 trillion – the pre-easy policy level – to restore market function, a former BOJ executive director told MNI, adding that the Bank also needs to clarify its parameters for determining the proper functioning of JGB markets.
Lowering holdings to previous levels would also help minimise the risk of BOJ intervention and maintain fiscal discipline, said Kenzo Yamamoto, now the representative for KY Initiative.
The BOJ announced its plan to reduce the scale of JGB buying at the July meeting, which will see its monthly purchase amount eased over the next two years to about JPY3 trillion by Q1 2026. If the BOJ then maintains this scheduled, it will take 14 years to lower its holdings to about JPY120 trillion from JPY590 trillion, he explained.
“Restoring market functioning means not only to move the interest rate freely, but also to minimise the intervention,” he added. “This means that the BOJ doesn’t need to hold huge excess reserves.”
The BOJ’s JGBs holdings rose to JPY456 trillion between April 2013 and March 2023 against JPY480 trillion of primary issuance, or about 95% of fresh government paper.
The Bank’s significant buying could be mistaken for fiscal financing, despite the BOJ labelling it part of its easy-policy settings, and it should clarify when it expects to restore proper market function, Yamamoto said, warning the government’s economic policy involved additional bond issuance that could impede the reduction strategy.
Yamamoto also called for faster policy normalisation, noting a December hike would not be surprising. (See MNI INTERVIEW: Ex BOJ Official Urges Faster Hikes, Eyes Dec)
POLICY REVIEW
Pointing to the Bank’s plan to review the past 25 years of monetary policy, Yamamoto argued officials should instead focus on the unprecedented easy policy over the last 11 years under former Governor Haruhiko Kuroda.
“The BOJ should review or analyse that the past easy policy might have eased or contributed to easing fiscal discipline,” Yamamoto said, adding the Bank should also study other side effects, such as lower productivity and a delay to the economy's "metabolism."
The Bank should eventually also restore the banknote principle, which was temporarily suspended in April 2013, as the final goal, he said, adding that the temporary suspension of the banknote rule drove large scale BOJ bond buying and unruly bond issuances.
The banknote rule was designed to maintain fiscal discipline by ensuring the scale of BOJ JGB purchases were within the balance of banknotes.