The Bank of Japan has tweaked its unprecedented asset purchase program twice over the past three weeks, supporting a view in financial markets that the central bank is increasingly reluctant to be viewed as financing the government’s debt.
The moves were the first since the BOJ launched its radical “quantitative and qualitative” monetary easing program in April 2013 to help end nearly two decades of deflation under an economic revival plan adopted by Prime Minister Shinzo Abe.
The BOJ is buying up massive amounts of Japanese government bonds and other financial assets from banks to flood the economy with cash in hopes of raising the inflation rate to 2 percent.
But on May 29 and Wednesday, the bank repeatedly lowered the minimum amount of bonds with longer maturities it will purchase outright each month under the program.
The adjustments were specifically aimed at lowering the BOJ’s purchases of JGBs with residual maturities of more than 10 years.
The decision means the BOJ is apparently aiming to make it easier to control the average residual maturity of its overall bond holdings with a target of about seven years.
However, participants in the domestic sovereign debt market said the repeated adjustments are rare, and they are trying to figure out the bank’s intentions.
Takafumi Yamawaki, chief rates strategist at JPMorgan Securities Japan Co., called the BOJ’s move the “beginning of tapering” at a “psychological” level, suggesting the bank may want to prevent its asset purchases from funding the government by monetizing the debt.
“It is highly possible that the BOJ was increasing its caution against debt monetization,” given that many people are saying the Government Pension Investment Fund should overhaul its investment strategy while selling part of its huge bond holdings to the BOJ, Yamawaki said in his report.
The GPIF is set to change how it invests its massive pool of premiums as part of Abe’s revamped growth strategy later this month.
The ¥129 trillion fund, the world’s biggest of its kind, had 55 percent of its assets in domestic bonds at the end of 2013 and is looking to increase the ratio of Japanese stocks in its portfolio, which stands at around 17 percent.
Lawmakers and economists endorsing GPIF’s proposed allocation review say the BOJ could be a buyer of the bonds the fund is looking to unload — a proposal that is making waves among BOJ officials who traditionally believe that the moral hazard of monetizing the debt will only harm the nation’s economic and financial stability.
BOJ Gov. Haruhiko Kuroda, a former top Finance Ministry official in charge of international finance, is united with Abe in battling deflation. After he was thrust into the post, he launched his quantitative and qualitative easing policy in April 2013 and set an inflation target of 2 percent.
Kuroda has repeatedly stated the BOJ will not hesitate to adjust the policy if downward risks to inflation materialize, signaling it may further ease monetary conditions to pursue Abe’s goals.
In its latest decision at the June 12 to 13 meeting, the BOJ kept policy steady, taking heart from three factors: the steady uptick in inflation as measured by the core consumer price index — the government’s preferred flavor of CPI, the subdued fallout from the April 1 sales tax hike, and an upturn in economies abroad.
The repeated cuts to purchases of JGBs with longer maturities fall short of offering evidence the central bank is about to taper its radical easing policy like the U.S. Federal Reserve is doing, because the changes also involved steps to increase buys of JGBs with shorter maturities, namely those up to one year.
Also, the BOJ is still buying JGBs from financial institutions at a pace that will raise its outstanding holdings by about ¥50 trillion a year.
Still, the latest adjustments to the buying program are expected to reduce the BOJ’s exposure to ultralong-term government bonds, causing upward pressure on interest rates on 30- or 40-year debt in a development that may be seen as contradictory to the bank’s promise to prevent yields from spiking over the entire range of sovereign debt to protect Japan from bankruptcy.
“We are facing growing uncertainty over the outright purchases” of bonds by the BOJ, a dealer working for a foreign bank in Tokyo said. “Very few people in the market now believe the BOJ will further ease its policy in the near term.”