BOJ Is Said to Mull Change or Abandonment of JGB Maturity Range

John Normand: A BOJ JGB Change 'Very Positive for Yen'

The Bank of Japan is considering either a tweak to or an abandonment of its guidance on the range of government bonds that it buys, according to people familiar with the discussions.

Any shift would reflect a desire by policy makers to give themselves greater flexibility as they continue with the unprecedented scale of debt purchases, the people said, asking not to be named as the talks are private.

The BOJ last adjusted the guidance in December, extending the average remaining maturity of JGBs it buys to about seven to 12 years, from seven to 10 years previously. The thinking at the time was to pull down borrowing costs across the yield curve.

Things changed dramatically in the aftermath of Governor Haruhiko Kuroda’s adoption of a negative interest rate on a portion of commercial banks’ reserves. That move, unveiled in January, sent even long-term yields tumbling to unprecedented levels. Kuroda last week noted the potential downside of this dynamic on the economy.

Now, policy makers may want to ensure that yields at the long end of the yield curve remain in significantly positive ranges. Giving themselves greater flexibility as they vacuum up chunks of the bond market would let them be more tactical, staying away from some maturities if the yields fell below desired levels.

Comprehensive Review

No decision has been made, and BOJ officials are still completing their comprehensive review of policy that culminates in the Sept. 20-21 policy meeting. Any change would increase bond traders’ focus on the BOJ’s monthly Financial Markets Department release on planned bond purchases, which offers guidance on what securities it plans to buy.

Kuroda said in a speech on Sept. 5 that the narrowing between short- and long-term yields had dented commercial banks’ profits, while lower long-term yields had weighed on pension returns, causing some businesses to cut their profit forecasts. He said the central bank should consider such effects in its review of its policies.

Yields on longer-date bonds have risen sharply in response to indications from the BOJ that it was weighing the effects of the flatter yield curve. Twenty-year yields rose as high as 0.475 percent Monday, from a record minus 0.005 percent touched in July. They were at 0.44 percent Tuesday.

‘Excessive Yield Curve’

“The policy review is likely to be about fixing an excessive yield curve,” Kiichi Murashima, chief Japan economist at Citigroup Inc., wrote in a report Monday. “Chances are high that they will make targeted average maturity of bond purchases more flexible.”

The BOJ has bought longer-dated bonds during Kuroda’s tenure as it sought to stoke inflation and economic growth by pumping money into the financial system. Kuroda more than doubled the average maturity of JGBs it bought to seven years when he launched his easing program in April 2013, and lengthened it again in October 2014 and December 2015.

The BOJ’s monthly report outlining planned JGB purchases may be sufficient to communicate its intentions in the event that the central bank decides to stop listing the target range of maturities in its monetary policy statements, the people said. 

For September, the BOJ plans to buy 1.8 trillion yen-3.6 trillion yen of JGBs with a maturity of more than five years and up to 10 years through about six auctions, according to a monthly guide.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE