MNI POLICY: BOJ Wants To Keep Reducing Bond Purchases

The Bank of Japan will decide whether to slow the pace of its reduction in bond purchases from the current JPY400 billion per quarter by considering market developments ahead of its June 16-17 meeting, but it is leaning towards making no change, MNI understands.

Officials largely judge that tapering has been digested relatively smoothly, and that it would not be appropriate to intervene in response to falling market demand for bonds, particularly of longer duration, given the end of the BOJ’s yield curve control policy. The recent rise in long-end yields was not caused by tapering, but was a normal market response to Ministry of Finance bond sales, BOJ officials judge. 

Any alteration to the pace of tapering would be likely to see purchases reduced by only JPY200-300 billion from around April next year, but officials would have to justify the move by pointing to market disruption and an unnecessary rise in bond yields.

Recent poor auctions came after insurance companies failed to buy as many longer-dated bonds as the Ministry of Finance had anticipated, though officials believe that volatility was amplified by foreign speculative selling.

Governor Kazuo Ueda has insisted that the BOJ will continue to reduce its purchases in a predictable manner while allowing enough flexibility to support market functioning. The Bank's outstanding JGB holdings remain high, the governor, who follows a risk-management approach, has noted.

Long-end volatility has not so far prompted the BOJ to conduct any extraordinary bond buying operations as it judges there to have been no threat to financial system stability. (See MNI POLICY: BOJ Could Buy More JGBs, Keep Lowering Holdings)