Some at BOJ Are Said to Still Favor JGBs in Any Stimulus Boost

  • Bond buying has been core of easing since Kuroda took office
  • Kuroda, Nakaso highlighted powerful effect of negative rate

The Yield-Curve Woes Facing the BOJ

Some Bank of Japan officials still favor stepping up purchases of government bonds if the board decides it needs to expand stimulus, according to people familiar with the discussions.

Their views suggest that cutting a key interest rate deeper into negative territory, or expanding purchases of risk assets such as real-estate investment trusts, aren’t the only options if the board concludes at the end of the BOJ’s comprehensive review that more action is needed. 

Among those open to considering expanding overall monetary accommodation, views are divided on which single step or combination of steps would be most effective, according to the people, who asked not to be named as the discussions are private. That makes the result of the Sept. 20-21 board meeting hard to anticipate; there is also the potential for no further action to be taken at that time.

Economists surveyed by Bloomberg showed only a slight majority anticipating expanded easing next week, with a rate cut as the most likely option. BOJ Governor Haruhiko Kuroda and Deputy Governor Hiroshi Nakaso last week highlighted the negative rate’s power in pulling down borrowing costs, saying it hadn’t hindered banks’ lending ability so far.

The two top BOJ policy makers also, however, highlighted the risks of excessively low long-term yields, and BOJ officials are considering steps to give themselves greater flexibility in their bond purchases -- a shift that could help them sustain yields at the longer end of the debt curve if needed.

To learn about one potential tweak in the central bank’s bond-buying guidance, click here.

Yield-curve concerns haven’t dissuaded at least some BOJ officials from thinking that an increase in government-bond purchases would be a good option, should the board decide to expand stimulus, according to people familiar with the talks.

That cuts against a narrative in the Japanese government bond market that the BOJ is running out of room to increase its purchases, already at an annual pace of 80 trillion yen ($776 billion). The central bank now possesses more than one-third of outstanding JGBs.

The bond market’s concerns did find an echo ahead of the July 29 declaration of a comprehensive policy view, when an increasing number of officials were becoming concerned about the sustainability of the existing framework for monetary easing, according to people familiar with the discussions at the time.

This time, some BOJ watchers have speculated that the central bank may shift its target for JGB purchases to a range, to give itself more flexibility. Kuroda, in an interview with the Sankei newspaper last month, said the board would discuss things including setting a range for the bond buying -- the core of the Kuroda stimulus program since it was launched in April 2013.

One view within the BOJ is that any range for bond purchases must not include a bottom that is below the current 80 trillion yen annual target, according to people familiar with the discussions. The risk is that any move to a range such as 70 trillion yen to 90 trillion yen would be viewed by the market as a stealth tapering, according to that view.

Even moving to a range above 80 trillion yen would have little value, compared with a simple increase in the bond-buying target, in the view of at least some BOJ officials.

The increasing diversity of views among board members carries one particular danger, in the views of some central bank watchers. One strong advocate of JGB buying could potentially force the hand of Kuroda and others on the board by proposing a vote to expand the purchase target, which matches the annual target for boosting the monetary base. 

It would potentially be difficult for Kuroda to vote against such a move, because such a vote from him could be seen by the markets as evidence that he sees limits to expanding what was the central pillar of his program. The governor has consistently said there is ample scope for additional action on all three fronts -- buying more JGBs and risk assets and cutting the negative rate. That’s a view shared by some other officials at the BOJ, according to the people.

Meantime, two board members whose terms expire next July -- Takahide Kiuchi and Takehiro Sato -- have a track record of opposing any expansion in stimulus.

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