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Capital Markets

BOJ holds rare JGB sale to resupply tight market

First reverse repo in years addresses distortion caused by easing

Japanese government bonds have been in short supply lately.

TOKYO -- The Bank of Japan sold Japanese government bonds with repurchase agreements for the first time since 2008 on Friday, aiming to relieve a shortage brought on by its massive debt purchases and aggravated by a fiscal-year-end demand surge.

The BOJ supplied about 1 trillion yen ($8.99 billion) in government bonds to financial institutions after receiving more than 2 trillion yen in bids. The sales will be executed Monday, and the bonds will be repurchased April 3, after the new fiscal year begins April 1.

This reverse repo operation may seem like a step in the opposite direction from the BOJ's frequent purchases of JGBs from financial institutions as part of its monetary easing program. But the central bank's aim is not to mop up excess liquidity, as is typically the case with such operations, but to deal with a supply shortfall that has worsened rapidly of late.

The clearest sign of this scarcity appeared in the repurchase market, in which banks and other investors temporarily swap bonds for cash. The benchmark one-week repo rate plunged 68.6 basis points to a record low of minus 0.788% on Thursday, data from the Japan Securities Dealers Association shows. "This is the first time the rate has fallen so much in a single day," said Takenobu Nakashima of Nomura Securities.

As the end of the fiscal year approaches, financial institutions are scrambling to buy JGBs, which look better on their balance sheets than does excess cash. This comes on top of persistent demand for JGBs as collateral for financial transactions.

With demand ballooning and the market lacking enough bonds to go around, repo rates sank deeper into negative territory Thursday as borrowers paid higher premiums.

The BOJ responded swiftly that evening, announcing the reverse repo operation as well as plans to suspend purchases of short-dated bonds for the rest of the month. These unusual measures quickly returned calm to the market, and the one-week repo rate rebounded to minus 0.145% Friday.

Yet the BOJ itself is a root cause of the problem. The central bank buys nearly all newly issued long-term JGBs and purchases trillions of yen in short-term notes each month. "The market's JGB shortage has become chronic as easing has dragged on," Toshiaki Terada of Totan Research said.

Though the market is expected to settle down for the time being once the new fiscal year begins, the side effects of easing, including a dearth of JGBs and market gyrations like those seen this week, will not be resolved so easily.

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