Spotlight on BOJ Moves From Monetary Policy to Market Operations

  • Yield-curve control prompts shift as broad policy is on hold
  • Investors pore over every move of markets operations division

Last year, attention on the Bank of Japan focused squarely on its nine-member board and the thinking of key officials at the monetary affairs department.

After six months of monetary policy on cruise control, and little prospect of change in 2017, the spotlight has turned to the financial markets department and its daily and monthly operations.

While Governor Haruhiko Kuroda and the board set down basic guidelines in September to pin short-term interest rates at -0.1 percent and the yield on 10-year government bonds at about 0 percent, they left management of this yield-curve control program to the financial markets department. This means everything from which bonds to buy and when, to how to purchase them, whether it be on a regular schedule or in special actions.

"The bond operations have been the only focus of the market since the yield-curve control program began, whereas before it was Kuroda’s comments and the board’s policy statements," said Maiko Noguchi, a senior economist at Daiwa Securities Co. and a former BOJ official. "Investors can’t help but go this way because of the increasing dominance of the BOJ in the market. Even a small change by them can move the market."

Key Players

Akio Okuno, the head of market operations division, and his boss, financial markets department chief Seiichi Shimizu, are key players, leading yield-curve management from nondescript offices on the fourth floor of the BOJ’s Tokyo headquarters, far from the wood-paneled boardroom many floors above.

Okuno and his staff make decisions on operations, which they typically run by Shimizu, according to people familiar with the matter. The pair, who combined have more than five decades experience at the central bank, consult Executive Director Masayoshi Amamiya, who has overall oversight of the markets and monetary affairs groups.

‘Mr. BOJ’: Read more on Amamiya’s key role.

Okuno’s staff frequently call bond dealers to better understand market conditions, analyzing what they hear and filtering out self-interested advice from traders before determining purchase operations, said the people, who asked not to be named because the matters are private.

Last week provides a good example. After the biggest drop in a decade in the rate for bond repurchase agreements, or repos, the bank released an unscheduled one-page statement at 5 p.m. on Thursday announcing that the BOJ would conduct a repo operation the next day. That pushed rates right back to near where they’d been before.

Vital Announcements

Meanwhile, the department’s announcement on the schedule of bond purchases for each month is getting more and more attention. It’s prompted the BOJ to provide more transparency on its intentions by revealing the exact dates for most of its purchases from March.

Many investors are also looking at the monthly tally of purchases for signs of a future rate hike or tapering of asset purchases, even though Kuroda has repeatedly said that these market operations don’t provide a guide to monetary policy.

Read more: The stealth tapering debate.

But they do affect the market significantly. When the central bank offered to buy fewer bonds than expected in February, 10-year yields shot up. A few hours later, Okuno and his colleagues brought the rate sharply down by offering to buy an unlimited amount of bonds at a fixed rate.

The BOJ hasn’t given more information on its plans because a certain amount of vagueness gives it flexibility, said Takafumi Yamawaki, chief rates strategist at JPMorgan Chase & Co. in Tokyo.

“This allows various interpretations in the market, so bond traders have to keep a close eye on each operation announcement,” Yamawaki said. “We have to figure out what the BOJ means by ‘about 80 trillion’ by watching the operations. It’s not that important for the overall economy but market participants are living on the smallest changes, like a few basis points.”

Click here to learn more about the 80 trillion yen purchase target.

For now, without knowing the exact size of the scheduled purchases, or when the bank might surprise with a special operation, bond market participants will keep closely watching the BOJ’s announcements at 10:10 a.m. and 2 p.m.

It will also release its regular outline for next months bond purchases on March 31.

Key Tools of the BOJ’s Financial Markets Department
Security typeOperation typeFrequency
Government SecuritiesOutright purchases of JGBs - regular scheduled operationsAbout 21 scheduled in March
Outright purchases of JGBs - unscheduled fixed-rate operations2 so far
Purchase/Sale of Japanese government securities with repurchase agreementsRepo sale last week was first since 2008
Outright purchase/sale of treasury discount bills
Securities lending facility
Sale of bills
Other SecuritiesOutright Purchases of CP and corporate bonds
Purchases of CP with repurchase agreements
Purchases of ETFs and J-REITs
Fund-supplying operationsFunds-supplying operation against pooled collateral
U.S. dollar funds-supplying operations against pooled collateral
Securities lending to provide JGSs as collateral for the U.S. dollar funds-supplying operations
Other currency-supplying operations (GBP, CAD, CHF, EUR)
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