REPEAT: MNI INSIGHT: BOJ Sees Firmer JGB Stock Effect

Repeats Story Initially Transmitted at 03:45 GMT Sep 11/23:45 EST Sep 10

By Hiroshi Inoue

     TOKYO (MNI) - Bank of Japan officials believe the stock effects from

cumulative Japanese Government bond purchases will increase, enabling the

central bank to smoothly scale back its bond buying, MNI understands.

     With stock effects working well, officials maintain the view that the BOJ

doesn't need to buy more JGBs than necessary to keep the short-term interest

rate at zero percent and the 10-year bond yield in a range of -0.2% to +0.2%.

     With the stock effects working well, the BOJ believes if supply-demand

conditions in the JGB market tighten in the future, the impact of a unit amount

of the bank's JGB purchases on long-term yields should have greater impact, all

else being equal.

     --LIQUIDITY LEVELS

     As of end July, the outstanding balance of JGBs held by the BOJ is above

40% of the total issuance.

     BOJ officials think the high share of the BOJ's bond holding will increase

stock effects, but reduce market liquidity as the share of the BOJ's holdings

exceed certain thresholds.

     Under these conditions, the BOJ continues to provide securities lending

facilities to the market to alleviate the pressure on overall market liquidity.

     --WIDER BANDS

     Under its current policy framework, the BOJ is paving the way for the

10-year bond yield to move widely and flexibly as the economy and inflation

rates develop, as well as reacting to overseas bond moves.

     However, if bond yields rise to rapidly, the BOJ will step in and purchase

bonds as required.

     In order to gauge functioning in the bond markets, BOJ officials are

focused on how the 10-year JGB yield rises or falls widely and flexibly

following U.S. Treasury bond yield moves.

     Following the July 31 policy meeting, Governor Haruhiko Kuroda said the BOJ

would allow a wider range of +0.2% to -0.2% for the 10-year JGB yield, double

the previous unofficial range of +0.1% to -0.1%. This, the central bank hopes,

should help boost the functioning of the tepid JGB market.

     Before the BOJ amended the policy framework at the July meeting, the BOJ

conducted fixed-rate bond buying operations at 0.110% when the 10-year yield

showed a sign of rising above 0.110%. However, when the 10-year yield rose to

0.145% in early August, the BOJ didn't conduct a fixed-rate bond buying

operation, allowing the 10-year yield to move more widely.

     Although not using the tool of a fixed rate operation in August, the BOJ

did complete a Y400 billion unscheduled bond buying operation on August 2 in

order to cap the upside on 10-year yields. 

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

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com