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BOJ near limit for bond buys but boost may be needed

Bloomberg

The Bank of Japan is approaching the upper limit of its target for buying bonds, raising prospects it will need to expand the scope of its stimulus program to support the economy before a tax increase.

The BOJ bought ¥6.8 trillion worth of sovereign notes in December, the least since it boosted the program to more than ¥7 trillion a month in April, data compiled by Totan Research Co. show. The buys may slow further to avoid exceeding the average annual target of a ¥50 trillion increase in the BOJ’s holdings for the year, said Tokai Tokyo Securities Co. and Totan, a Tokyo-based research unit of money-market broker Tokyo Tanshi Co. The holdings swelled by ¥50.3 trillion in the nine months that ended Dec. 31.

BOJ Gov. Haruhiko Kuroda could signal to the market that a slowdown does not represent a scaling back of his accommodative policy or he could raise the holdings ceiling, according to Sumitomo Mitsui Banking Corp. The government’s plan to increase the sales tax to 8 percent in April from 5 percent is forecast to trigger a 4.3 percent economic contraction in the second quarter. The 10-year sovereign bond yield was at 0.66 percent Monday, compared with 2.82 percent in the U.S.

“Investors think the BOJ is just taking a break and will increase buying when the effect of the sales tax hike comes in,” said Tadashi Matsukawa, the head of fixed-income investment at PineBridge Investments Japan Co. “Japan’s yields are staying at these levels because of this assumption.”

Kuroda said last month that the pace of buying is “flexible” to achieve the holdings target. The amount of bonds the BOJ has is more important than the monthly purchases, he told reporters.

The 10-year yield slid for a fourth year in 2013, the longest stretch since 2002, even as inflation started to pick up from a two-year low in March. The yield will probably climb to 0.85 percent by Dec. 31 after falling six basis points last year, the median estimate of economists shows in a Bloomberg survey. A basis point is 0.01 point.

“The BOJ’s monthly purchases will decline to about ¥6.4 trillion,” Kazuhiko Sano, the chief bond strategist at Tokai Tokyo Securities, told reporters and institutional investors Wednesday. “I don’t think the decreases would have a large impact on the market, considering investors paid little attention to the decline that we saw in December.”

The BOJ will boost stimulus by the end of September, 80 percent of the 35 economists polled last month estimated.

“The amount the BOJ needs to buy this year is about ¥6.5 trillion a month” after taking into account its bond holdings that come due, Izuru Kato, the president of Totan, wrote in a research note on Jan. 9. “The BOJ is more likely to boost purchases should the decrease destabilize bond yields.”

The BOJ’s total assets have climbed to ¥229 trillion, or 48 percent of the nation’s nominal gross domestic product. The central bank aims to increase its balance sheet further to ¥290 trillion by the end of this year.

In contrast, the Federal Reserve’s assets were equivalent to 24 percent of the U.S. GDP. With the central bank reducing its monthly bond buying by $10 billion to $75 billion starting in January, economists polled forecast the Fed will keep cutting purchases and end the program this year.

“It may be too late to prevent long-term rates doing something crazy” should the BOJ hold off on tapering before inflation reaches the target, said Richard Koo, the chief economist in Tokyo at Nomura Research Institute Ltd. The stimulus is leaving Japan at risk of falling into a quantitative-easing “trap” of being unable to taper without a surge in long-term rates and subsequent damage to the recovery, according to Koo, a former Federal Reserve economist.

Japan’s consumer prices excluding fresh food but not energy — the BOJ’s policy target — rose 1.2 percent in November. The core inflation rate has advanced from negative 0.5 percent in March, the lowest in two years. Its goal is 2 percent inflation.

“The BOJ will probably reaffirm that its stance remains the same and explain a slowdown in purchases isn’t a deliberate reduction,” said Daisuke Uno, the Tokyo-based chief strategist at Sumitomo Mitsui Banking Corp., a unit of Japan’s second-largest financial group by market value.

“If the tax hike badly hurts the economy, the BOJ will provide additional stimulus without any hesitation.”