MNI POLICY: BOJ Sees No Need Of Upping Longer-End JGB Buying

International investors have reduced their purchases of long-term Japanese government bonds, but the Bank of Japan is unlikely to increase its bond buying programme in response due to strong domestic demand for these securities, MNI understands.

The BOJ increased its long-dated JGB buying programme in June. The move was intended to smooth a spike in yields on the back of increased issuance by the Ministry of Finance. The BOJ's lack of recent activity has led to market speculation that the central bank may have intended the yield curve to steepen

.--ALTERNATIVE JGB BUYERS

The drop in bond buying by non-Japanese players is being offset by purchases by domestic investors such pension funds, life insurers, and regional banks. The BOJ views this trend as an opportunistic one by investors in response to market conditions.

Bank officials have noticed that activity by non-Japanese players in the cash JGB market has fallen recently, although their activity in the bond futures market remains high. International investors exit from the cash market is a function of a falling dollar premium, the BOJ views.

This dollar premium has fallen recently as major central banks have taken advantage of the U.S. Federal Reserve's swap line, reducing the demand for long-term JGBs. The BOJ had also observed that international investors reduced purchases of JGBs as VIX rose.

--SKEW INDEX WORRY

There has been a slight fall in volatility recently and BOJ officials are now concerned about the rising SKEW index, which indicates tail risks.

History has shown that stock prices have plunged when SKEW index stay high level and volatility remains low.