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Economy

Too big for a shrinking pond?

TOKYO -- The Bank of Japan faces the possibility of being unable to sustain the pace of its government bond purchases -- for want of bonds.

     BOJ Gov. Haruhiko Kuroda insists that there is "no end" to the financial assets the central bank can buy. But he faces dissent from within his own ranks.

     At an April 30 policy board meeting, Takahide Kiuchi proposed slowing purchases of long-term Japanese government bonds from the current 80 trillion yen ($668 billion) a year to 45 trillion yen. Staying the course would yield diminishing returns while risking big side effects, Kiuchi argued.

     But his eight fellow board members voted against the proposal as they had earlier that month. Many question the wisdom of throttling back JGB purchases while the BOJ struggles to reach its 2% inflation target. Slamming the brakes would have a huge impact on financial markets, critics also contend.

     But Kiuchi's proposal can hardly be called reckless. The Japanese government plans to issue nearly 37 trillion yen of new debt in fiscal 2015. This means that the BOJ must buy some 43 trillion yen worth of JGBs from banks and other holders. But "we can't let them go willy-nilly," a senior executive at a major bank says, explaining that the lender needs to maintain a certain level of government bonds, to use as collateral, for example.

     Japan's giant Government Pension Investment Fund sold off roughly 9 trillion yen of JGBs in fiscal 2014 as it began increasing its exposure to equities and foreign bonds. But this outflow will thin as the fund approaches its new asset allocation targets, notes Masahiro Nishikawa of Goldman Sachs Japan.

     Bond traders report a noticeable decline in investor participation in the BOJ's bond purchases over the past few months. The ratio of the value of JGBs financial institutions are willing to sell to the value the BOJ wants to buy came to 2.7 in the January-March quarter -- the lowest since the central bank launched its current quantitative easing program in April 2013. And the ratio has remained depressed since this past April. People in the BOJ's operations department, where monetary policy meets the markets, describe the task ahead as "digging into hard-packed snow."

     The BOJ will hit a shortfall in JGB purchases as early as the spring of 2017, Barclays Securities Japan predicts. Some reckon that it could happen as soon as this year if the bank steps up the pace to provide more monetary stimulus.

Confident Kuroda

"I don't think we'll encounter problems with our bond purchases going forward," Kuroda told reporters April 30.

     A senior BOJ official makes an even bolder assertion.

     "There are more than 600 trillion yen of government bonds left in the market," this official says. "If [holders] don't let go of them, we'll keep buying even if it means interest rates of negative 1%."

     The yield on 10-year JGBs is already near zero. "The effect that easing has had through interest rates is tapering off," concedes a senior BOJ official who supported the most recent expansion of the asset-buying program. The case for pushing interest rates below zero is questionable, as are the effects on prices.

     "If the BOJ lets on that it has few cards left to play, it will have a hard time influencing expectations," says Izuru Kato of Totan Research, speculating on what Kuroda and like-minded board members are thinking.

     "That's why they can't let their appearance of confidence slip," Kato adds.

     On the same day Kiuchi failed in his latest bid to slow bond purchases, the policy board decided to push back the projection for reaching 2% inflation to the first half of fiscal 2016. The BOJ urgently needs to rev up price growth, lest the blame game for failure threaten the continuity of its monetary policy. But its printing press may be running out of steam.

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