REPEAT:MNI BOJ INSIGHT:Ready To Cut JGB Buying But No Tapering

Repeats Story Initially Transmitted at 05:10 GMT Sep 5/01:10 EST Sep 5

By Hiroshi Inoue

     TOKYO (MNI) - The Bank of Japan is taking advantage of tight bond market

conditions and geopolitical risks to scale back its buying of Japanese

government debt to make it easier to eventually exit from massive monetary

stimulus, but the central bank does not consider the current slowdown in JGB

purchases as a "tapering" of current easy policy, MNI understands.

     The BOJ stands ready to further reduce the scale of its purchase of

Japanese government bonds if market conditions allow it to do so.

     BOJ officials define tapering as "reducing the scale of bond buying as a

policy objective," not the current "passive" cuts in JGB purchases in response

to recent market conditions.

     However, BOJ officials see the recent slowdown in the bank's asset

purchases aimed at preventing bond yields from falling too fast as the BOJ

"taking advantage" of current market conditions to allow it to plan ahead for

its eventual exit from aggressive easing.

     With inflation still just above zero and far below the bank's 2% target, it

is uncertain how long it will be before the process of unwinding of asset

purchases begins. The bank has to confirm first that inflation is anchored

around 2% and the economy is unlikely to slip back into deflation.

     "Reducing the scale of JGB buying mainly in response to a drop in bond

yields is a passive cut and isn't equivalent to so-called tapering and an active

cut" in bond buying, said a person familiar with BOJ thinking. "The BOJ will not

be able to consider actively reducing the scale of bond buying before the

achievement of its 2% inflation target."

     The person, however, added that if market conditions warranted, the BOJ

would reduce further the pace of its bond purchases to slow the rise in its JGB

holdings, which in turn would make the eventual unwinding of its aggressive

easing policy smoother.

     The BOJ has increased or reduced the scale of its purchases of JGBs

depending on fluctuations in JGB yields.

     On Aug. 25, the BOJ reduced the size of its purchases of JGBs with a

remaining life of five to 10 years to Y410 billion per operation from Y440

billion, after cutting it from Y470 billion on Aug. 16 and from Y500 billion on

July 24.

     This reversed the increase in the buying in this zone to Y500 billion from

Y450 billion that occurred on July 7.

     On Sept. 1, the bank slowed the pace of its purchase of JGBs with a

remaining life of three to five years to Y300 billion from Y330 billion.

Purchases in this zone had been gradually reduced from Y420 billion at the

beginning of this year to Y300 billion by May 1 but were increased to Y330

billion on July 12 in response to market conditions.

     While shifting its monetary easing target to controlling the relatively

flat yield curve at near zero levels last September, the BOJ has maintained the

guideline for JGB purchases at an annual pace of about Y80 trillion.

     However, the annualized pace of the BOJ's purchases of JGBs slowed to Y65.4

trillion in August from Y77.7 trillion in February as a result of the slower

pace of purchases, according to MNI calculations based on BOJ data.

     The amount of JGBs purchased by the BOJ in August totaled Y7.8 trillion, up

from Y7.45 trillion in July but down from Y9.72 trillion in April, Y8.57

trillion in March, Y9.55 trillion in February and Y9.71 trillion in January.

     Another person familiar with BOJ thinking said that it remains uncertain

whether the BOJ will continue to reduce the scale of its bond buying every month

because any reduction depends on how bond yields behave.

     The person, however, said that the BOJ is willing to reduce the scale of

its bond buying if it can do so without pushing down stock prices or causing the

yen to rise sharply.

     A drop in bond yields would be the key reason for the BOJ to reduce its

bond-buying operations further, but BOJ officials would be careful to ensure

that any action they take would not upset the markets. Reducing the scale of

bond purchases when investors were in a risk-off mood could trigger a yen rise,

and thus a drop in domestic stock prices.

     This month, the BOJ has lowered its purchase plans for JGBs with a

remaining life of five to 10 years to a range of Y300 billion to Y500 billion

per operation from a range of Y350 billion to Y550 billion in August.

     The bank extended the lower end of the range to give itself more leeway in

operations. The BOJ is currently buying Y410 billion of JGBs with a remaining

life of five to 10 years per operation. The previous lower end of Y350 billion

was only Y60 billion below the current pace but there is a wider Y110 billion

margin to the new end of Y300 billion.

     BOJ officials are more vigilant against downward pressure on JGB yields

than on upward pressure because of continued tight supply-demand conditions

backed by BOJ buying and banks' need to buy new bonds before existing issues

mature. There is also safe-haven buying of fixed-income securities amid

geopolitical risks heightened by the threat of North Korean nuclear weapons and

missile attacks.

     At the same time, they are also prepared to respond to a jump in bond

yields by increasing temporarily the scale of bond purchases.

     BOJ officials remain cautious about removing the wording from the statement

released after policy meetings that sets out the bank's annual JGB purchase

guideline at "about Y80 trillion," even though it is no longer the main policy

target.

     They believe removing the wording could have an unexpected unfavorable

impact on financial markets by creating the incorrect impression among market

participants that the BOJ had begun tapering policy.

--MNI Tokyo Bureau; tel: +81 90-2175-0040; email: hiroshi.inoue@marketnews.com

--MNI Tokyo Bureau; tel: +81 90-4670-5309; email: max.sato@marketnews.com

--MNI BEIJING Bureau; +1 202-371-2121; email: john.carter@mni-news.com

--MNI Beijing Bureau; +86 (10) 8532-5998; email: vince.morkri@marketnews.com