The Gulf Today - Business - - SPECIAL REPORT -

TOKYO: The Bank of Ja­pan is con­sid­er­ing tweak­ing its bond buy­ing op­er­a­tions to al­low the govern­ment debt mar­ket to bet­ter re­flect fun­da­men­tals, peo­ple fa­mil­iar with the mat­ter said, fol­low­ing years of heavy cen­tral bank buy­ing in the sec­tor.

The pro­posed changes, which fo­cus on the way the BOJ times its bond pur­chases, would be aimed at re­viv­ing a mar­ket that many par­tic­i­pants say has been heav­ily skewed by cen­tral bank buy­ing.

While the cen­tral bank is in no rush to put such changes into place, sources say it will scru­ti­nise mar­ket moves to en­sure they are stable and that any tweaks it makes won’t trig­ger ex­ces­sive volatil­ity.

With in­fla­tion dis­tant from its 2 per cent tar­get, the BOJ is set to main­tain its mas­sive stim­u­lus pro­gramme at a two-day rate re­view end­ing on Wed­nes­day and re­frain from mak­ing any big change to its pol­icy frame­work for the time be­ing.

BOJ pol­i­cy­mak­ers, how­ever, see scope to change the way the cen­tral bank buys bonds, as its huge pur­chases are cur­rently di­min­ish­ing trad­ing vol­ume and keep­ing bond yields in a tight band, the sources say.

The BOJ’S bond pur­chases were orig­i­nally in­tro­duced as a way to bring mar­ket yields down in or­der to re­duce bor­row­ing costs and spur eco­nomic growth.

One of the crit­i­cism of the pro­gramme is that in­vestors have lit­tle in­cen­tive to trade debt among them­selves. In­stead, many seek to eke out gains by buy­ing debt in govern­ment auc­tions and im­me­di­ately sell­ing them to the cen­tral bank.

“It’s un­nat­u­ral for mar­kets to fo­cus so much on each and ev­ery move of the BOJ,” one of the sources said. “There’s al­ways room to re­view the BOJ’S mar­ket op­er­a­tions.”

Sev­eral ideas are un­der con­sid­er­a­tion, such as re­duc­ing the fre­quency of the BOJ’S bond pur­chases or mak­ing slight changes to the tim­ing of its govern­ment debt pur­chases to en­cour­age more trad­ing ac­tiv­ity be­tween fi­nan­cial in­sti­tu­tions, they say.

The cen­tral bank cur­rently buys debt in the open mar­ket one day af­ter the fi­nance min­istry auc­tions new bonds. It could push back the pur­chases a few days to al­low these bonds to cir­cu­late in the mar­ket longer, the sources say.

While cen­tral bank pol­i­cy­mak­ers won’t rule out such ideas, they are also in no rush to im­ple­ment them par­tic­u­larly when mar­kets are un­sta­ble, the sources say.

“The tim­ing is tricky. It would be un­wise to make any changes when mar­kets are jit­tery,” an­other source said. “The BOJ’S in­ten­tion isn’t to cre­ate volatil­ity but to give mar­kets room to move a bit more re­flect­ing fun­da­men­tals.”

Dis­agree­ment within the BOJ’S nine-mem­ber board on the fu­ture di­rec­tion of mone­tary pol­icy might also de­lay the tim­ing of such changes, as ad­vo­cates of ag­gres­sive eas­ing could push back against any steps that may push up yields, an­a­lysts say.

Un­der a yield curve con­trol pol­icy adopted in 2016, the BOJ now guides short-term in­ter­est rates at mi­nus 0.1 per cent and the 10-year govern­ment bond yield around zero per cent.

The cen­tral bank took steps in July to al­low bond yields to move more flex­i­bly around its tar­get, re­flect­ing con­cerns among pol­i­cy­mak­ers that its heavy buy­ing is dis­tort­ing mar­kets.

The BOJ has also slowed its bond buy­ing to less than half the amount it loosely pledges to buy each year, as its dom­i­nance in the mar­ket al­lows it to cap yields with fewer pur­chases.

But the moves have done lit­tle to re­vive trad­ing ac­tiv­ity, as in­vestors re­frain from push­ing up yields on ex­pec­ta­tions that in­fla­tion will re­main sub­dued and pre­vent the BOJ from rais­ing rates any time soon.

Mean­while the Ja­panese govern­ment bond prices edged lower on Tues­day as Tokyo eq­ui­ties bounced af­ter sev­eral days of losses and curbed de­mand for safe-haven debt.

The bench­mark 10-year JGB yield rose 1 ba­sis point to 0.115 per cent and the 20-year yield was also 1 ba­sis point higher, at 0.635 per cent.

The Nikkei gained 1.3 per cent, re­cov­er­ing some losses af­ter a 3-day los­ing streak, dur­ing which it sank to a seven-month trough.

JGBS also came un­der mild pressure as Tues­day’s reg­u­lar bond­buy­ing op­er­a­tion con­ducted by the Bank of Ja­pan at­tracted stronger of­fers to sell from mar­ket par­tic­i­pants com­pared to the pre­vi­ous op­er­a­tion. The BOJ of­fered to buy 880 bil­lion yen ($7.81 bil­lion) of one- to 40-year JGBS on Tues­day.

The key 10-year Ja­panese govern­ment bond fu­tures con­tract edged up to a fresh three-week high on Mon­day as many in­vestors opted to wait and watch ahead of the Bank of Ja­pan’s pol­icy meeting and an­nounce­ment on its bond-buy­ing plans, due later this week.

Ten-year JGB fu­tures gained 0.08 point to 150.80, their high­est level since July 31, with a trad­ing vol­ume of 39,696 lots.

The bench­mark cash 10-year JGB yield was steady at 0.110 per cent.

Su­per-long JGB yields re­treated, with the 20-year, the 30-year and 40-year yields dropped half a ba­sis point each to 0.625 per cent, 0.855 per cent and 1.015 per cent, in that or­der.

Many in­vestors opted to stay on the side­lines and wait un­til Wed­nes­day, when the BOJ ends its two-day pol­icy meeting and re­leases de­tails of its monthly bond-buy­ing plans for Novem­ber. On Mon­day, Reuters re­ported the BOJ is con­sid­er­ing tweak­ing its bond-buy­ing op­er­a­tions to al­low the JGB mar­ket to bet­ter re­flect fun­da­men­tals, cit­ing peo­ple fa­mil­iar with the mat­ter, fol­low­ing years of heavy cen­tral bank buy­ing in the sec­tor.

Ear­lier on Satur­day the Bank of Ja­pan said that it will con­sider mak­ing a slight change to the tim­ing of its govern­ment debt pur­chases to en­cour­age more trad­ing ac­tiv­ity be­tween fi­nan­cial in­sti­tu­tions, the Asahi news­pa­per re­ported on Satur­day. The cen­tral bank cur­rently buys debt in the open mar­ket one day af­ter the fi­nance min­istry auc­tions new bonds as part of quan­ti­ta­tive eas­ing.

The BOJ will con­sider push­ing these pur­chases back to two days af­ter the auc­tion of new debt to al­low these bonds to cir­cu­late in the mar­ket for longer, the Asahi said with­out cit­ing sources.

The cen­tral bank may also con­sider re­duc­ing the fre­quency of its pur­chases of mid- and long-term debt, the Asahi said.

Any de­ci­sion on the tim­ing or fre­quency of debt pur­chases would not con­sti­tute a change in mone­tary pol­icy, so the move would not need to be made by the BOJ’S pol­icy board, the news­pa­per said.

In­stead, the de­ci­sion rests with BOJ of­fi­cials who man­age mar­ket op­er­a­tions, the Asahi re­ported.

The BOJ is ex­pected to keep mone­tary pol­icy un­changed at its next meeting end­ing Oct.31.

The BOJ in July changed pol­icy to al­low for a slightly larger in­crease in long-term yields, partly due to con­cerns that its debt pur­chases were crowd­ing out other in­vestors.

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