BOJ EYES TWEAKS TO BOND-BUYING PROGRAMME
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.