BOJ Tapering Sees Bond Buying Slow Toward 70 Trillion Yenby and
80 trillion yen target seen axed once market conditions allow
’Main scenario’ is target gone in 2017, strategist says
The Bank of Japan has signaled it’s shifting away from a quantitative easing framework for monetary stimulus -- and it shows.
While BOJ policy makers technically have retained their target for the annual increase in government bond holdings at 80 trillion yen ($699 billion), there are signs the buying may come in closer to 70 trillion yen. For the year so far, the tally is 71.7 trillion yen, versus 75.3 trillion over the same period last year, data compiled by Bloomberg show.
The new focus for policy since September has been setting short- and long-term interest rates, the so-called yield curve control framework. Yet, partly out of concern at a potential adverse market reaction, the BOJ retained its previous quantitative target. That may be poised for elimination once Governor Haruhiko Kuroda and his colleagues are convinced there won’t be a yen surge off the back of such an announcement.
"The BOJ is not going to need to purchase 80 trillion yen to keep the yield curve under control," said Tomo Kinoshita, chief market economist at Nomura Securities Co. in Tokyo. "At some point in time they are going to drop the language on 80 trillion yen."
One consideration is that at least two BOJ board members are perceived to be fans of continued JGB buying. A dissenting vote against dropping the quantitative target could potentially give a mixed signal to the market about how stimulative the central bank’s stance is.
Deputy Governor Kikuo Iwata, who came to the board from a career in academia, was one of those who first came up with a monetary-base expansion plan through bond buying. On Wednesday, he said that any drop in bond purchases would be small for the time being and that it’s inappropriate to think the BOJ is focused on rates and not quantity. Fellow board member Yutaka Harada, who had a career as a bureaucrat before joining academia and subsequently the BOJ, has also developed a reputation as an ardent reflationist.
Even so, Kuroda has repeatedly underscored that the new policy, adopted Sept. 21, is more sustainable. Bond investors have for some time warned that the central bank faced a looming shortage of bonds to buy after it grew to account for more than one third of outstanding securities, and trading liquidity plummeted.
"If they blindly pursue an expansion of the money supply, yields will fall too much," said Katsutoshi Inadome, a senior bond strategist at Mitsubishi UFJ Morgan Stanley Securities Co. in Tokyo. "What they need to prioritize is just the 10-year JGB yield. They need to make adjustments so they don’t buy too much."
What offers board members some cheer is that the market hasn’t worked against it since the September shift -- and recently, a falling yen and rising stock market is just what the reflation doctor ordered. If there’s a continuation of the current global market dynamics -- spurred by optimism that President-elect Donald Trump will implement fiscal stimulus that stokes inflation pressures worldwide -- it could give enough confidence for a tweak in the policy statement.
"Our main scenario is the BOJ will scrap the monetary base expansion target in the first half of the next fiscal year, and change the target of its bond buying to ‘around the current amount,’" Inadome said.