Bond purchases in focus as Bank of Japan sets policy

Each month, the Bank of Japan plans to purchase approximately $38 billion worth of government bonds each month – Copyright AFP Yuichi YAMAZAKI

Kyoko HASEGAWA

The Bank of Japan is expected to keep interest rates steady on Friday, but reports indicate it may gradually reduce its huge stockpile of government bonds as it moves away from long-term ultra-loose monetary policy.

The central bank raised rates in March for the first time since 2007 in a bid to normalize policy without destabilizing the world’s fourth-largest economy.

Most analysts do not expect another increase after the end of the two-day political meeting on Friday.

But the Nikkei business daily reported on Thursday that they are “discussing adjustments” to a long-standing approach of spending heavily on bonds and other assets to pump liquidity into the system and keep borrowing costs low.

The BoJ plans to purchase about $38 billion worth of government bonds each month, but policymakers are currently considering whether to reduce that amount, media outlets including Kyodo News reported.

Such a move could mark another step away from nearly two decades of quantitative easing aimed at eliminating stagnation and harmful deflation from the Japanese economy.

The scale of the BOJ’s total assets is enormous – larger than the country’s gross domestic product – and the bank holds more than half the value of all Japanese government bonds (JGB) in circulation.

Cutting bonds has been under consideration for months.

A policymaker opinion cited in the minutes of the BoJ’s April meeting said the bank “should indicate its intention to reduce the amount of JGB purchases” because it “needs to reduce the size of its balance sheet.”

Shunsuke Kobayashi, chief economist at Mizuho Securities, told AFP that reducing the number of bonds would help the BOJ reduce debt ahead of potential future interest rate increases.

At the same time, the bank is under pressure from the Prime Minister’s Office to address the cheap yen,” he said.

Other central banks around the world have aggressively raised interest rates in recent years to tackle rising inflation.

But the BoJ largely stuck to its easy-money policies, culminating in the Japanese currency hitting a 34-year low in April, prompting authorities to move into forex markets.

“I believe a monetary policy response is warranted (for the BOJ) to prevent a weak yen from driving up import prices and suppressing consumption,” said Hiroshi Namioka of T&D Asset Management.

And since a reduction in government bond purchases is already widely expected, if the BoJ decides not to do so, the yen will fall further, he warned.

The BoJ wants demand-pull inflation to reach 2%. and was achieved monthly from April 2022.

In addition to the time to implement a negative interest rate policy on outliers in March, the bank abandoned other unconventional policies, including a yield curve control program that allowed bonds to move within a narrow band.