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Since the Bank of Japan shifted its monetary policy emphasis toward quantitative easing a year ago, the daily balance of funds held in its current account has more than trebled.

By setting a higher target for commercial bank reserves in its current account, the BOJ aims to provide interbank lending markets with virtually interest-free money.

The BOJ has also increased its outright purchases of government bonds. Its monthly purchases of long-term government bonds now constitute a 2.5-fold increase over the previous year’s level.

The primary objective of quantitative monetary easing is to stabilize commodity prices.

Since the fall, however, the objective has changed.

The BOJ now seems intent on keeping tabs on ballooning government bond issuances.

Accordingly, it is certain that outright purchases of long-term JGBs by the BOJ will continue to increase, regardless of how the real economy changes.

There appears to be a good chance that these monthly outright purchases will surge to 1.2 trillion yen by the end of June and to 1.6 trillion yen by the end of the year.

Since the JGB market has already discounted the fact that massive JGB issues are slated for the medium and long terms, it seems that no major concerns will emerge over the anticipated increase in the amount of outright purchases at this pace.

While there is a strong chance that major rating agencies will lower Japan’s sovereign rating by a notch or more by June, many analysts believe the JGB market will not suffer a dramatic drop.

An increase in the outstanding balance of JGB issues is a foregone conclusion as far as the Finance Ministry is concerned. The latter is only interested in ensuring the adequacy of funding sources.

Major banks will probably continue to hold a certain amount of government bonds as alternative assets after writing off nonperforming loans.

But the possibility remains that management at Japanese banks will be profoundly shaken by the introduction of new banking rules by the Bank for International Settlements, presumably in 2005.

Thus it may be necessary for the BOJ to seriously reconsider its JGB management policy shortly.

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