BoJ: Comparing with overseas central banks, a reduction of ¥2-3 trillion is desired
Following the conclusion of the first day of meeting with market participants, the Bank of Japan (BoJ) said that it “received various views from participants in the survey including idea to reduce monthly buying to around ¥2-3 trillion, or to keep buying around V4 trillion.”
“Opinions from bond market participants on pace of tapering included idea to taper at set pace swiftly, or taper swiftly at set pace then taper moderately in several stages, or reduce buying gradually over two years,” the BoJ said.
Additional takeaways
Comparing with overseas central banks, a reduction of ¥2-3 trillion is desired.
Bond purchases should ultimately serve as a monetary adjustment tool, indicating a zero purchase amount is crucial.
A gradual reduction aiming for ¥1-2 trillion would be ideal.
Considering the principles of IRRBB, a reduction of ¥4 trillion should be appropriate keeping in mind the limited flexibility in domestic bond operations.
BoJ should aim for a reduction to about ¥5 trillion and if the situation with the bond market stabilises, then additional reductions should be considered.
The BoJ is holding in-person meetings with market participants over the next couple of days. Three meetings are scheduled with banks, securities firms and those buying bonds for financial institutions to discuss the reduction of its Japanese Government Bond (JGB) purchases, which will be announced at the next meeting on July 30 and 31.
Market reaction
Following these headlines from the BoJ, USD/JPY is holding steady at around 160.85, having failed to sustain above 161.00 earlier in the Asian session.
Bank of Japan FAQs
The Bank of Japan (BoJ) is the Japanese central bank, which sets monetary policy in the country. Its mandate is to issue banknotes and carry out currency and monetary control to ensure price stability, which means an inflation target of around 2%.
The Bank of Japan has embarked in an ultra-loose monetary policy since 2013 in order to stimulate the economy and fuel inflation amid a low-inflationary environment. The bank’s policy is based on Quantitative and Qualitative Easing (QQE), or printing notes to buy assets such as government or corporate bonds to provide liquidity. In 2016, the bank doubled down on its strategy and further loosened policy by first introducing negative interest rates and then directly controlling the yield of its 10-year government bonds.
The Bank’s massive stimulus has caused the Yen to depreciate against its main currency peers. This process has exacerbated more recently due to an increasing policy divergence between the Bank of Japan and other main central banks, which have opted to increase interest rates sharply to fight decades-high levels of inflation. The BoJ’s policy of holding down rates has led to a widening differential with other currencies, dragging down the value of the Yen.
A weaker Yen and the spike in global energy prices have led to an increase in Japanese inflation, which has exceeded the BoJ’s 2% target. Still, the Bank judges that the sustainable and stable achievement of the 2% target has not yet come in sight, so any sudden change in the current policy looks unlikely.
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