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The Bank of Japan is on course to buy the smallest amount of Japanese government bonds in more than two years in January, fanning suspicions among bond traders that it might be gradually reducing its massive bond purchases.
The BOJ has bought ¥8.25 trillion ($72.1 billion) of conventional JGBs so far this month and is widely expected to refrain from buying on Tuesday when it makes policy announcements. In the past, the central bank has shunned buying JGBs on policy announcement days.
On Tuesday, the BOJ is set to keep monetary policy steady and is expected to seek to allay speculation of an early tapering of its massive stimulus.
Purchases of JGBs in January are on track to be the smallest since October 2014, when the central bank stepped up its bond-buying, increasing the pace of increase in its bond holdings to ¥80 trillion per year from ¥50 trillion.
The BOJ scrapped that policy in September and instead introduced a new one of guiding the 10-year JGB yield around zero per cent while keeping short-term interest rates at minus 0.1 per cent - a framework it calls the “yield curve control’’.
Even under the new policy, however, the central bank has said it would maintain the pace of bond-buying for now.
But many bond market players suspect the new framework is a prelude to a reduction in the BOJ’s massive bond-buying, the pace of which is considered as unsustainable.
To stack up ¥80 trillion more of JGBs on its balance sheet per year, the BOJ had on average bought about ¥9.4 trillion per month between November 2014 and September 2016. During that period, the lowest monthly figure was ¥8.41 trillion, inMarch 2015.
Main policy target
The BOJ’s average monthly purchases have been slightly bigger than the total offering of conventional JGBs by the Ministry of Finance through its regular auctions.
“The BOJ doesn’t want to intentionally reduce its bond purchase. But it will reduce its buying if it causes a distortion in the market or if JGB yields fall too much,” saidIzuru Kato, chief economist at Totan Research Institute.
“Its main policy target is interest rates (not the size of its bond holdings). And through the process of achieving that target, if its buying falls short of ¥80 trillion, the BOJ may lower its projection of bond buying afterwards,” he added.
The BOJ’s buying in January is more than 10 per cent belowthe 2016 monthly average and compares with ¥9.07 trillion in December.
On top of conventional JGBs, the BOJ buys a small amount of inflation-linked bonds and floating rate bonds.
Many market players also expect the BOJ to reduce buying in April, when the government plans to trims the amount of JGBs it issues.
The Bank of Japan will announce its bond-buying plan for February at 5:00 p.m.
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