February 2, 2017 1:00 pm JST
BOJ watch

Speculation emerges on BOJ's exit from credit easing

Central bank's unexpected moves cause yields to fluctuate

MAKOTO NAKANISHI, Nikkei staff writer

BOJ headquarters in Tokyo

TOKYO -- For the fourth month in a row, the Bank of Japan has held its plans to buy Japanese government bonds steady for February, disappointing market players following unexpected moves by the central bank.

Market participants were bracing as the BOJ held off on an expected JGB purchase in late January, before suddenly increasing the amount of buying.

The latest outline of outright JGB buying represents the first of the planned purchases for February, giving clues as to the amount of purchases in each operation. JGBs with remaining maturities of more than one year but less than three years, more than three years but less than five years, and more than five years but less than 10 years are drawing market attention. The BOJ plans to buy some 400 billion yen ($3.53 billion), 420 billion yen and 410 billion yen worth of them, respectively. It also plans to conduct the buying operation for them five to seven times during the month.

The BOJ upset market expectations on Jan. 25 as it held off on the purchase of JGBs with maturities of more than one but less than three years and more than three but less than five years. Two days later, however, it increased the purchase of JGBs with maturities of more than five but less than 10 years by 40 billion yen from the previously known amount, to 450 billion yen.

The unexpected moves aroused speculation as to whether the BOJ is preparing to taper its quantitative easing of credit. With market participants split in their views on the BOJ's stance on monetary easing, yields on JGBs fluctuated wildly.

To prepare for the long-term implementation of its large-scale monetary relaxation policy to pull Japan out of deflation, the BOJ introduced a new policy framework in September, aimed at keeping long-term interest rates around zero. The purchase of JGBs has become a key tool for the framework.

"As purchase amounts may well continue to rise or fall to steer long-term rates, we hope market participants will become used to such changes as early as possible," a senior BOJ official said.

The supply of liquidity through the massive purchase of JGBs, subject to lingering skepticism about its effectiveness, was the principal tool for the credit-easing policy prior to the introduction of the new framework. As the BOJ has continued to buy JGBs "mechanically" to meet a huge annual target of 80 trillion yen, market players are "unaccustomed" to drops in purchase amounts, said another senior official at the central bank.

Under the new policy framework, 80 trillion yen has become the guideline for steering long-term interest rates, rather than a "target that must be cleared." The JGB purchases that upset market expectations were a move to bring long-term rates to, or near, zero.

Investors always try to foresee market trends down the road in a bid to boost returns. They follow all of the BOJ's moves and try to figure out reasons whenever they fail to make accurate forecasts. They will continue dialogue with the BOJ to seek clues.

While the BOJ, for its part, will tenaciously continue easing credit under the new framework, it will need to slow the pace of buying JGBs when it comes close to an exit from the policy. In such a case, the BOJ will have to seek to avoid market turbulence.

The question now is, is it premature to say that a senior BOJ official's call for market players to promptly become accustomed to declines in the amount of JGB purchases suggests the bank is starting preparations for an exit?

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