MNI POLICY: BOJ Aims To Cut JGB Bond Buying Level In July

The Bank of Japan is toying with how it can lower the scale of its Japanese government bond-buying programme without injecting volatility into the rates market or sharply raising long-term yields and could potentially lower the largely ambiguous JPY6 trillion monthly level found within its March board communications to JPY5 trillion at the July 30-31 meeting, MNI understands.

The BOJ, however, will not actively lower the scale of its programme which is dictated by market developments, such as tight JGB conditions or low bid-to-cover ratios.

While BOJ officials prefer to operate without a strict monthly purchase quota, the Bank included a JPY6 trillion level as a footnote to its communication following the board's March decision to exit negative rates and scrap yield curve control. But the figure, which does not require a board vote, does not represent a rigid rule and BOJ officials would prefer to keep its operations ambiguous.

The Bank has no plans to intervene frequently in rates markets and wants to leave moves to market forces, which is driving its desire to lower its JGB presence. It also wants to limit changes to the programme to avoid market confusion that it is still targeting long-term rates, while maintaining its ability to intervene should yields rise too rapidly.

The Bank will adjust the footnote within the July communications should officials successfully reduce purchases to JPY5 trillion by the end of June without causing a rise in long-term interest rates and increasing volatility.

However, bank officials are worried a delay to U.S. interest-rate cuts risks upward pressure on JGB yields.

COMMITMENT REMAINS

The Bank will maintain its commitment to "continue its JGB purchases with broadly the same amount as before,” repeating the line from its previous communications, which will require a board vote.

The BOJ does not want to embark on U.S. Federal Reserve-style bond-buying decreases due to the size of its holdings, as any periodical reduction could increase JGB volatility.

Any buying decrease due to market developments will also differ from intentional reductions noted by BOJ Governor Kazuo Ueda, who has repeatedly stated a willingness to reduce bond buying and lower the size of the Bank's balance sheet in future, without providing any specific details.

The Bank's bond holdings will also naturally decrease next year due to maturities. The BOJ in October 2014 increased the annual pace of JGB buying to JPY80 trillion from JPY50 trillion and changed the average remaining maturity of the bank’s purchases to about seven years.