BOJ May Stop Cutting Bond Purchases With Yields on the Rise

  • Central bank expected to keep ranges steady for all maturities
  • Minor tweaks possible within ranges if yields decline

The ‘stealth’ tapering of bond buying by the Bank of Japan may take a summer break, at least for June.

With medium-term Japanese government bond yields on the rise, a further scaling back of monthly debt purchases -- details of which are due for release Wednesday -- could risk upsetting the market, strategists say. That means the central bank may keep the pace of buying as is for now, after reducing it in recent months.

“Our main scenario is for the BOJ to keep its buying ranges unchanged,” said Shuichi Ohsaki, chief Japan rates strategist at Bank of America Merrill Lynch in Tokyo. “Markets are seeing a top for now in the medium-sector yields after they edged higher. Reducing buying in this environment could risk destabilizing markets.”

Since Japan’s central bank unveiled its yield-curve control policy in September, its monthly bond-buying plans have become a key signal on how policy makers view the state of the debt market. The BOJ gives ranges for the amount it’ll spend at each auction and specifies purchase dates for each maturity, helping investors to work out whether the pace of its buying will increase or slow.

A decline in 1-to-5-year government bond yields prompted the BOJ to lower its targeted range of purchases for these maturities in April and May. Since then, the two-year yield has rebounded to minus 0.17 percent from a year-to-date low of about minus 0.29 percent early in March, while the five-year yield has risen to minus 0.12 percent from its year-to-date low of about minus 0.18 percent in April. Japan’s 10-year yield traded at about 0.04 percent on Monday in Tokyo.

The fact that the 10-year yield is stuck around 0.05 percent is preventing the five-year from rallying, according to Souichi Takeyama, a rates strategist at SMBC Nikko Securities Inc. in Tokyo. The rise in two- and five-year yields appear to be halted for now even though they remain under upward pressure due to a lack of BOJ buying, he said.

No Urgency

“There is no urgency in light of the trend in yields, as the domestic economy is doing fairly well,” Takehama said. “The BOJ is likely to keep its buying plan unchanged in June, unless the yen strengthens past its April high, in which case it could boost buying.”

The Japanese currency rose to a year-to-date high of about 108 yen per dollar in April, before paring gains in May. It traded at just over 111 yen per dollar on Tuesday. A stronger yen hinders the central bank’s bid to reflate the country’s economy.

Still, minor tweaks such as reducing purchases of 1-to-3-year bonds by 10 to 20 billion yen ($180 million) are possible, should yields decline, said Merrill Lynch’s Ohsaki.

Based on the midpoints of its forecast purchase ranges, the BOJ is expected to buy 7.8 trillion yen of bonds in May. This compares with its estimate of 8.1 trillion yen of purchases for April, when the bank actually bought 8.3 trillion yen of debt.

From January to April, the BOJ has bought about 35 trillion yen of bonds in its market operations. Governor Haruhiko Kuroda acknowledged on May 10 the bank’s bond holdings are currently growing at an annual pace of around 60 trillion yen -- well below the guideline in its policy statements.

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