BOJ Surprises With Cut to Bond Purchases Ahead of Japan Holidays

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The Bank of Japan cut bond purchases for the first time in two months, surprising traders as local markets approach a 10-day shutdown for this year’s extended Golden Week holidays.

Key Insights

• The central bank offered to buy 160 billion yen ($1.4 billion) of securities maturing in the 10-to-25 year zone at Friday’s regular operation, versus 180 billion yen previously. It also lowered purchases of debt maturing in more than 25 years to 40 billion yen, from 50 billion yen at the last operation
• The move comes as global bond yields, including Japan’s, have recovered from lows seen earlier in the year, when concerns about world growth intensified. That’s owing to better-than-expected U.S. and Chinese economic data, rising prospects of a trade deal and the delay to Brexit -- all of which have boosted appetite for risk assets and dented the appeal of fixed-income securities
• Market watchers say the tapering was unexpected, given that the central bank had refrained from cutting purchases earlier when yields were much lower. Also, chances of a cut were seen as slim ahead of Japan’s 10-day holiday break from April 27 through May 6
• Taking into account all maturities, Friday’s reduction was the first since Feb. 12, when the central bank reduced buying in the 10-25 year zone by 20 billion yen. The cut in the 25-year plus segment was the first since September
• The BOJ’s board is scheduled to meet April 24-25 to consider policy

Market Comments

• “The BOJ responded to the recent excessive curve flattening,” says Mari Iwashita, chief market economist at Daiwa Securities Co. “It took advantage of an improving overseas market environment, as U.S. yields have paused their recent declining trend”
  • Move signals intention to keep tapering gradually when the financial environment is favorable
  • BOJ probably saw it easier to add upward pressure on yields when they have stopped falling, rather than trying to stem the decline when they are in a downward trend
  • Still, decision to cut was unexpected a week before Japan’s long holidays
• Markets may not react if the BOJ’s moves come when they are widely expected, says Hidehiro Joke, market analyst at Mizuho Securities Co. in Tokyo. So, by surprising the markets, the BOJ has sent a signal and effectively pushed up yields in 40-year and other maturities

JGBs, Yen

• Japan’s 10-year yield rose after the BOJ’s move and was up 1bp on the day at minus 0.025%. It touched -0.10% on March 28, the lowest since August 2016. JGB futures also fell after the operation
• The yen was little changed at 111.93 per dollar

Background

• JGB yields fell with global peers earlier this year as rising concerns over world growth and a dovish shift by major central banks intensified a debt rally. They extended declines as BOJ Governor Haruhiko Kuroda said the central bank could consider more stimulus if the exchange rate affected the nation’s inflation and economy
• Kuroda recently said 10-year bond yields’ recent slide into negative territory isn’t a problem for the central bank’s yield curve control policy. In December, he said that Japanese yields falling into the negative territory is not a problem if the moves reflect economic fundamentals
• The BOJ aims to keep benchmark 10-year yields in a range around zero percent as part of its yield-curve control policy introduced in September 2016

--With assistance from Saburo Funabiki.

To contact the reporter on this story: Chikako Mogi in Tokyo at cmogi@bloomberg.net

To contact the editors responsible for this story: Tan Hwee Ann at hatan@bloomberg.net, Shikhar Balwani, Cormac Mullen

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