MNI BOJ WATCH: Cut To JGB Buys; Close Rates Decision

MNI ((MNI) Tokyo) - MNI (TOKYO) - The Bank of Japan is widely expected to announce a path towards gradually reducing its maximum monthly government bond purchases by roughly half to about JPY3 trillion after its July 30-31 meeting, but its decision on whether to raise its benchmark interest rate for a second time this year is set to be a close call.

The BOJ, which has already said that it will make a “sizeable” cut to its bond buying, is confident that this can be done without causing a spike in long-term yields and is likely to announce that it will provide a tight range for its expected purchases on a quarterly or monthly basis in order to ensure that markets are not taken by surprise.

One option would be for reductions of bond purchases to be put on a Federal-Reserve-style autopilot, following a pre-announced schedule, but officials prefer to retain some margin of control given the level of uncertainty in financial markets. It will also continue to be prepared to carry out fixed-rate bond purchases when necessary. (See MNI INTERVIEW: BOJ Needs 10-20 Years To Run Down Bond Holdings)

RATE DECISION

While BOJ board members generally agree that inflation and other economic data have been in line with April projections, there is disagreement over the extent to which they indicate sluggishness in private consumption, and to which this is likely to be boosted by nominal wage rises. The decision on whether to raise rates is likely to be close, with some policymakers likely to prefer to delay a hike until September or October, giving them more time to assess wage hikes at smaller firms, while arguing that there is little risk for the BOJ of falling behind the curve on inflation. (See MNI POLICY: Consumption Risk Could Make BOJ Hike Harder)

In March, the BOJ faced a similar question of whether to wait for more confirmation of inflationary trends, but opted to simultaneously raise its interest rate from negative levels and to abandon yield curve control.

The judgement of Governor Kazuo Ueda will be key to the final decision, and if he decides to propose a hike he will have the immediate backing of two deputy governors on the nine-member board.