MNI STATE OF PLAY: BOJ Review Focus On Flexible JGB, ETF Buys

The Bank of Japan looks set to formalize the trading band currently tolerated for 10-year JGBs and clarify its stance on purchases of Exchange Traded Funds at the March meeting, as it prepares to tweak and not radically overhaul its strategy when policymakers finally lay out the conclusions of the policy review set up in November.

The board will likely reject calls to widen the band it is happy to see JGBs trading in, as such a move would not be consistent with controlling yields at overall low levels along the curve at a time the BOJ tries to help engineer the economy's recovery from the Covid-19 pandemic.

Although its is certainly not the aim, bank officials are cognizant that the outcome of the strategy review could be interpreted as the bank intending to tighten its current easy policy and widening the range could send JGB yields higher, which in turn will destabilize financial markets ahead of the end of fiscal year.

CLARIFICATION

But the board could clarify its position on just how much flexibility it is prepared to tolerate on the JGB range via a formal policy statement which it would hope could both boost transparency and to deepen communication with the financial markets.

The current range, which sees a band of 20 bps either side of the 0% target for 10-year JGBs, is based on remarks by BOJ Governor Haruhiko Kuroda and not official guidance in policy statements.

The bank will likely confirm that is sees a sharp fall in longer-dated yields as undesirable, noting that some volatility is necessary to keep markets functioning correctly.

The BOJ's markets operations department could publish its April bond buying schedule on the same day as the Board's policy decision and strategy review are released, again a move that would be seen by policymakers as offering greater transparency..

PRIORITIZED ETF BUYING

The BOJ is also set to reword the section of the post-meeting policy statement that covers prioritized purchases of ETFs. It will largely confirm its current stance, leaving the upper limit of purchases at an annual JPY12 trillion as the Board will not look to trigger market negative reaction, although it may look to clarify that purchases will only be undertaken when term premiums are under pressure.

The main policy settings, including the benchmark overnight deposit rate, will almost certainly be left unchanged, although the BOJ will reconfirm that it will deepen negative interest rates if necessary, taking any unfavorable impact on banks' profitability into consideration.

Both the policy decision and the outcome of the strategy review are due to be released Friday March 19 around 0300 GMT.