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Economy

Bank of Japan inches back presence in bond market

Ownership of government debt falls first time in almost seven years to 42.99%

A view of the Bank of Japan's headquarters in Tokyo. The central bank is shifting to a monetary policy focus on market interest rates, not quantity of holdings.   © Reuters

TOKYO -- The proportion of government bonds held by the Bank of Japan fell for the first time in six years and nine months as the central bank gradually curbs its massive monetary easing program.

At the end of December, the BOJ held 42.99% of all issued Japanese government bonds, according to its own data, or 478 trillion yen ($4.29 trillion) of 1.11 quadrillion yen in outstanding debt, down slightly from 43% at the end of September.

The decline in the percentage is the first quarter-on-quarter drop since the end of March 2012. That date precedes the launch of Prime Minister Shinzo Abe signature Abenomics policy in December of that year, and the start of the BOJ's ultraloose monetary policy the following year.

The BOJ still stands above and beyond global peers in its share of sovereign debt ownership. Both the U.S. Federal Reserve and Bank of England hold between 10% and 30% of their countries' respective government bonds, said Hidenori Suezawa, an analyst at SMBC Nikko Securities.

The central bank remains the biggest single holder of JGBs. Its holdings of the instruments as of Dec. 31 rose 6.3% from a year earlier, compared to the 1.6% increase in outstanding government debt.

The BOJ pivoted from a quantitative stance to a rate-focused program in September 2016, and has trimmed its holdings of short-term bonds. It then tweaked its policy further last July to give the market more room to function, and since then purchases of long-dated debt have gradually subsided as well.

Another reason for the BOJ's reduced role as an owner of government bonds is the uptick of overseas purchases. Foreigners held 134 trillion yen of the instruments at the end of December, up 9.5% from a year earlier, accounting for an all-time high of 12.1% share of outstanding debt.

Through the end of 2018, interest rates in the U.S. and elsewhere have dropped. On the other hand, "Japanese government bonds were attractive because of the perception that their yields would not fall much because of BOJ policy," said Tsuyoshi Ueno, senior economist at the NLI Research Institute.

In fact, yields for the benchmark 10-year JGBs has hardly budged at all in recent days as bankers await the outcome of the Fed meeting ending Wednesday.

"The BOJ is adjusting the pace of JGB purchases so that it holdings do not surpass 50% of the GDP with an exit to its monetary easing in mind," said Suezawa.

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