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The Bank of Japan could take advantage of the recent stability in the JGB market and consider reducing its purchases of longer-end bonds, widening the range for yields beyond the current tight scope and meeting the need for flexibility, MNI understands.
No change is expected at this week's policy meeting, but if decided, would be part of the wider policy review due to be announced in March.
Reducing the scale of longer-end JGB purchases will affect the 10-year policy interest rate and the focus is on how the board tweaks the easy policy directive to bank officials in charge of daily open market operations.
Ten-year JGB yield - Source: Bloomberg
The BOJ is unlikely to widen the range of the 10-year policy rate as the impact on flexibility will be temporary given the previous widening in 2018. The BOJ officially continues to target the 10-year yield "at around zero percent" but tolerates a range of -0.2% to +0.2%, confirmed publicly by Governor Haruhiko Kuroda. The yield was briefly allowed to trade outside the band -- in August and September 2019, falling as low at 0.292%.
As of Tuesday, the 10-year JGB was trading at around 5 bps.
STIMULUS
The BOJ certainly doesn't want to force rates higher as rising Covid-19 infections and the second national lockdown weigh on the economy and stands ready to buy JGBs as needed to prevent a rise. However, while the bank want to prevent yields from rising unnecessarily, officials also do not want the curve to flatten too far.
Policymakers believe that if they do step back from the market and reduce purchases of JGBs, the impact will be very limited and life and pension funds will readily step in to pick up the slack as they chase yield, benefitting from holding the bonds until redemption.
Commercial banks, however, will initially post unrealized losses on their long-dated bonds if yields rise and hope trade is constrained to the current ranges.
Why MNI
MNI is the leading provider
of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.