MNI POLICY: BOJ Mulls Cut In Bond Buys As Early As Next Week

The Bank of Japan is likely to consider a reduction in its government bonds purchases from around JPY6 trillion a month by as soon as its June 13-14 meeting, barring further yen weakening, with officials noting that easing U.S. Treasury yields would help reduce the market impact of such a move, MNI understands.

Bank officials are paying close attention to U.S. jobs data due on Friday and its impact on financial markets before taking their decision, and even if the BOJ reduces its monthly purchases it will pledge to continue to buy bonds and to use other tools to prevent long-term interest rates from rising sharply.

One option would be to cut monthly JGB buying by around JPY500 billion, reducing annual purchases by JPY6 trillion yearly, the impact of which which would be dwarfed by the stock effects of the BOJ’s JPY589.7 trillion in holdings.

But officials see the need to ease uncertainties over its intention to reduce purchases, and are concerned that some investors are shunning longer-end bonds for fear of a sell-off. Communication will be key, with the BOJ determined to avoid market shocks. (See MNI POLICY: BOJ Board Weighs Pace, Scale Of JGB Reductions)

LONGER-TERM APPROACH

While any alteration to its JGB operations is likely to be accompanied by reassurances that there will be no further changes for some time, the BOJ will also have to decide how to describe its longer-term approach to trimming purchases. One possibility would be to announce that it will make periodic reductions.

The BOJ is confident that commercial banks, led by Japan’s mega banks, will be able to step into the market and fill the gap left by reductions in its own purchases, though new Basel rules governing interest rate risk in the banking book are likely to mean that lenders do not buy as much as they have in the past.

Commercial banks have room to buy roughly JPY200-JPY300 trillion in bonds, the BOJ considers, though it has no plans for rapid reductions in its stock of holdings.

The stock effects of the BOJ’s holdings are likely to continue to keep bond yields lower than otherwise, with officials previously calculating that they lower 10-year yields by about 100 basis points. This would imply that if the BOJ halved its balance to about JPY300 trillion, the rise in the 10-year interest rate would be limited to 50 basis points.

Officials are very conscious however that long-term interest rate are also influenced by other factors, including term premia and market conditions.