MNI POLICY: BOJ Could Buy More JGBs, Keep Lowering Holdings

The Bank of Japan stands ready to conduct more Japanese government bond buying operations if yields are judged to have reached undesirable levels but it is unlikely to change its stance of steadily lowering the balance of its JGB holdings, MNI understands.

However, if possible, the Bank wants to avoid radical countermeasures, such as reinvesting maturing bonds or increasing the scale of its periodical bond buying operations in response to in longer-end JGB yields.

Officials are aware that if the BOJ increases its intervention in JGB markets, it will be interpreted as a move towards returning to yield curve control, which would distort market functioning and would not be consistent with its recent policy approach. The view is widely-shared among bank officials that the Bank should intervene as little as possible following the end of YCC, and that yields should be set by the market.

And while the rise in longer-end JGB yields could worsen sentiment, the Bank maintains its assessment that short- and medium—term interest rates have more influence on the economy than the longer end. Still, officials admit that higher long-dated bond yields would increase unrealise losses at private financial firms, and that they do not have a full picture of their impact. (See MNI INTERVIEW: BOJ's JGB Reduction Pace Vital - Yamamoto)

CONTAGION

However what would seriously concern the BOJ and prompt it to act would be if higher longer-end JGB yields look like affecting other market rates including the unsecured overnight call loan rate.

But in theory, officials maintain the view that term premium continues to be contained by the stock-effects of the BOJ’s huge bond holdings.

Meanwhile the Ministry of Finance is likely to mitigate upward pressure on the long-end by changing the duration of its issuance. The MOF could temporarily increase issuance of Treasury bills, while reducing interest-bearing bond issues, which would make it easy for the BOJ to increase its purchases, although the MOF would have to roll over them frequently.

The BOJ at its June 16-17 meeting will conduct an interim assessment of the gradual reduction of its JGB holdings, though the Bank is likely to keep the policy interest rate unchanged at 0.50%. (See MNI POLICY: BOJ Weighs Trade Impacts, Oct Hike Potential)