The Bank of Japan may reduce purchases of government bonds in the next three months as upward pressure on yields recedes amid financial sector concerns.
(Bloomberg) — The Bank of Japan may reduce purchases of government bonds in the next three months as upward pressure on yields recedes amid financial sector concerns.
Japan’s 10-year yield has traded well below the 0.5% cap since March 10, when Silicon Valley Bank’s collapse jolted markets and spurred bets that the Federal Reserve will moderate its tightening. This backdrop provides an opportunity for the BOJ to buy less, according to strategists at SMBC Nikko Securities Inc., SBI Securities Co. and Mizuho Securities Co., which would be the first decrease since the third quarter of 2021.
“The BOJ is likely to continue cutting the amount should the 10-year yield fall toward the center of its band — at zero,” said Eiji Dohke, chief bond strategist at SBI. “That’s exactly what yield-curve control is about.”
Any cutback announced in the BOJ’s quarterly plan due Friday, whether by lowering the purchase band or the frequency of buying, would be a dramatic shift from earlier this year when it scooped up record amounts to cap yields. Much has changed since then, with a dovish tilt in the Fed’s latest decision reducing the pressure on incoming BOJ Governor Kazuo Ueda to pivot away from an ultra-easy policy.
SMBC Nikko’s Ataru Okumura expects the purchase range for the 5-to-10 year tenors to be lowered by about ¥100 billion ($755 million), and by ¥50 billion for the rest. Mizuho Securities’ Chief Desk Strategist Shoki Omori said the BOJ may nudge down the lower range to allow more “flexibility.”
Some forecast no change in the debt purchase plan, with conflicting risks of high inflation and an economic slowdown muddying the path for monetary policy. New Deputy Governor Shinichi Uchida said the bank shouldn’t communicate its decision in advance as it’s decided at every policy meeting, indicating potential surprise when the BOJ decides to shift tack.
“Although there continues to be downward pressure on yields recently, if concerns about financial sector ease, yields may stop falling and could turn its course again,” said Daisuke Uno, chief strategist at Sumitomo Mitsui Banking Corp., who expects no change in the debt purchase plan.
The BOJ conducts two kinds of bond-buying operations, one with a fixed yield and the other for a fixed amount. In the former, it buys an unlimited quantity of debt at a predetermined yield, now at 0.5%. In the latter, it purchases a fixed amount of bonds at the prevailing market yield.
Below is a table showing the first-quarter plan with the most recent purchases. The purchase amounts are in billions of yen.
–With assistance from Masaki Kondo and Saburo Funabiki.
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