BOJ Already Started Long Bond Taper Seen as Policy Option

  • Central bank cut superlong debt buying by a third since Jan.
  • Yields rose to six-month highs on bet BOJ wants steeper curve

Speculation the Bank of Japan will scale back longer-term debt purchases as soon as the meeting ending Wednesday has pushed yields to six-month highs. The truth is, the central bank has been doing it all year.

The BOJ’s own data show it has slashed buying of Japanese government bonds maturing in more than 25 years by a third since January, while cutting back on tenors of 10- to 25-years by almost a quarter. By contrast, purchases of debt maturing in less than a decade has been largely steady in 2016.

The monetary authority concludes a first-ever comprehensive review of the current stimulus settings to coincide with this week’s policy gathering. Investors have increasingly bet the BOJ will target a steeper yield curve, after Governor Haruhiko Kuroda acknowledged that low long-term yields hurt returns on pension and insurance investments. Even without a change in policy, the central bank’s seven-to-12-year range for the average maturity of bonds it buys allows broad scope for adjustments.

“Declines in superlong bond yields weren’t only a reflection of the BOJ’s purchases, but also the result of declining inflation expectations given the state of the economy,” said Tadashi Matsukawa, the Tokyo-based head of fixed-income investment at PineBridge Investments Japan.

Widening Spread

The spread between two- and 30-year JGB yields has widened from as little as 33 basis points in late June -- the least in data to 2006 -- to as much as 87 basis points last week. It was at 73 basis points on Wednesday in Tokyo.

The 30-year bond yield was 0.47 percent, and touched 0.605 percent last week for the first time since March 17. It reached a record 0.015 percent at the start of July.

Japanese investors had been pushed into longer tenors in a hunt for yield as that on even the 20-year bond dipped below zero this year. Yields on about 70 percent of the JGB market are negative.

The BOJ’s decision not to expand debt purchases at its meeting in July invigorated debate over the sustainability of its bond buying, even as Kuroda said there remains room to expand the program.

Former board member Sayuri Shirai said Tuesday it’s likely the central bank will focus any expansion of stimulus on the deposit rate.

“A deepening of the negative rate has fewer adverse effects than an expansion of quantitative easing,” she said at an event in Tokyo. “I expect asset purchases are going to get harder for the BOJ to make.”

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