Kuroda approaching limit on JGB buying, says ex-BOJ official

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Speeding up the Bank of Japan’s purchases of Japanese government bonds would risk further distorting the world’s second-biggest sovereign debt market, said Yuri Okina, vice chairman at Japan Research Institute.

“If additional easing is done using government bonds, it may have the considerable side-effect of impairing the functioning of the market,” Okina, an economist and a former BOJ official, said on Feb. 26 in an interview in Tokyo. “It will probably be difficult for the BOJ to boost the pace that it buys government bonds.”

Gov. Haruhiko Kuroda told the Diet last month that JGB liquidity hadn’t fallen particularly as a result of the purchases. He has also said the BOJ has “many options” and may need to get creative with any further monetary stimulus. Primary dealers responsible for distributing JGBs to investors told the government in November it was getting harder to determine prices because net supply was low.

The BOJ accumulates government bonds at an annual pace of about ¥80 trillion ($667 billion) under an unprecedented “qualitative and quantitative” easing program that Kuroda expanded in October. The policy gives the central bank room to soak up every new bond issued. The BOJ held ¥233 trillion of JGBs and treasury bills as of Sept. 30, or 23 percent of total issuance.

The BOJ’s purchases have had a “huge” impact on the market’s liquidity, Okina said. Buying bonds at a faster pace would make it more difficult for the BOJ to exit from its easing policy when the time comes to reduce stimulus, she said.

Yields on benchmark 10-year Japanese government bonds fell to a record low of 0.195 percent on Jan. 20 before swinging to a two-month high of 0.45 percent on Feb. 17. Historical volatility for the past 30 days touched a 21-month high of 4.56 percent on Feb. 25.

Okina said she sees no need for the BOJ to boost stimulus in response to slowing inflation caused by the drop in oil prices.

Declines in energy costs are good for many Japanese companies and the economy, she said. Consumer price gains may start picking up little by little later in fiscal 2015 starting in April, she said.

Okina, who serves on the government’s regulatory reform panel and a Finance Ministry fiscal advisory panel, said Japan needs to focus on implementing its growth strategy and fiscal reforms, rather than taking additional monetary stimulus at this point.

Etsuro Honda, an adviser to Prime Minister Shinzo Abe, said in November appointing a second female policymaker to the Policy Board would be “a good thing.” Sayuri Shirai is the only woman on the nine-member board.