News Column

FOCUS: Asset purchase tweaks suggest BOJ wary of being seen as funding gov't

June 19, 2014

Shinya Ajima

The Bank of Japan slightly adjusted its asset purchase program twice over the past three weeks, giving rise to the view in financial markets that the central bank is increasingly reluctant to be seen as financing the government's debt.

It was the first such move since the BOJ launched its unprecedented monetary easing in April 2013 to help move the economy out of nearly two decades of deflation under the economic revival policies of Prime Minister Shinzo Abe.

The BOJ has purchased massive amounts of Japanese government bonds and other financial assets from banks, aiming to inject sufficient money into the economy to raise the country's inflation rate to 2 percent.

But in its announcements on May 29 and Wednesday, the bank repeatedly lowered the minimum amount of bonds with longer remaining maturity that it will purchase outright each month under the program.

The adjustments were specifically aimed at the central bank buying fewer government bonds with residual maturity of more than 10 years.

With the decision, the BOJ is apparently aiming to make it easier to control the average residual maturity of its overall bond holdings, targeting about seven years.

However, participants in the domestic sovereign debt market said such repeated adjustments are rare as they sought to figure out what the bank really intends.

Takafumi Yamawaki, chief rates strategist at JPMorgan Securities Japan Co., called the BOJ's move the "beginning of tapering" at a "psychological" level, suggesting the central bank may want to prevent its asset purchases from funding the government.

"It is highly possible that the BOJ was increasing its caution against debt monetization" given that many people are saying the country's pension fund should overhaul its investment strategy while selling part of its huge bond holdings to the BOJ, Yamawaki said in his report.

The Government Pension Investment Fund is set to change how it invests its premiums, as part of Abe's new growth strategy to be announced later this month.

The 129 trillion yen ($1.27 trillion) fund, the world's biggest of its kind, had 55 percent of its assets in domestic bonds at the end of last year and is looking to increase the ratio of Japanese stocks in the portfolio from around 17 percent.

Lawmakers and economists endorsing the GPIF's proposed allocation review say the central bank could be a buyer of bonds the fund would unload -- a proposal apparently causing chagrin among BOJ officials who traditionally believe monetizing government debt would only do harm to economic and financial stability.

BOJ Governor Haruhiko Kuroda, a former top Finance Ministry official in charge of international finance, has allied with Abe in battling chronic deflation. He introduced "quantitative and qualitative" monetary easing in April 2013, with the 2 percent inflation target.

Kuroda has repeatedly stated the BOJ will not hesitate to make any necessary adjustments to its monetary policy if downward risks to inflation materialize, signaling the bank may further ease monetary conditions to facilitate Abe's policy.

In its latest decision at the June 12-13 meeting, though, the central bank kept its policy steady, taking heart from a steady increase in inflation as measured by the government's consumer price index, the subdued negative impact of the April 1 consumption tax hike on the economy, and an upturn in some overseas economies.

The repeated tweaks to reduce the BOJ's purchases of government bonds with longer remaining maturity fall short of offering any evidence that the bank is about to taper its quantitative monetary easing, as is being done by the U.S. Federal Reserve, because the changes also involved steps to increase the purchases of bonds with shorter residual maturity, namely up to 1 year.

In addition, the BOJ has maintained the policy of buying Japanese government bonds from financial institutions at a pace that will increase its outstanding amount of holdings by about 50 trillion yen each year.

Still, the latest adjustments to the buying program are expected to reduce the BOJ's exposure to ultralong-term government bonds, causing upward pressure on interest rates on 30- or 40-year debt in a development that may be seen contradictory to the bank's promise of a strong commitment to suppressing the yields of the entire range of sovereign debt.

"We are facing growing uncertainty over the outright purchases" of bonds by the BOJ, a dealer working for a foreign bank in Tokyo said. "Very few people in the market now believe the BOJ will further ease its policy in the near term."

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Source: Japan Economic Newswire

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