Bank of Japan to scale back bond purchases in Q1, boosting market liquidity

The Bank of Japan (BOJ) announced its plan to decrease the volume of bond purchases during the January-March quarter, aiming to inject additional liquidity into the market. The BOJ specifically lowered the minimum purchase amounts for bonds with maturities ranging from one to 10 years and also decreased the frequency of acquisitions of longer-dated notes.

The BOJ has been actively engaging in bond buying operations to support its ultra-low rate policy, which has led to a tightening of liquidity in the Japanese government bond (JGB) market and distortions in the yield curve. While the BOJ has gradually relaxed its control on the benchmark 10-year JGB yield, it remains a significant holder of JGBs.

BOJ's unexpected bond strategy

Anticipated by the market, the reduction in bond purchases comes as yields reached multi-month lows, mirroring the decline in US Treasury yields. However, the unexpected decrease in the frequency of offers for super long-dated bonds surprised strategists. According to Keisuke Tsuruta, a senior fixed-income strategist at Mitsubishi UFJ Morgan Stanley Securities, the BOJ's decision aligns with the Ministry of Finance's plan to reduce the issuance of 20-year bonds, as announced last week.

In response to rising interest rates impacting the demand for long-dated bonds, the Ministry of Finance decided to implement a 200 billion yen ($1.40 billion) cut in 20-year bond issuance, moving the reduction from April to January. Additionally, the BOJ adjusted the minimum amounts for shorter-maturity bonds following recent operations that approached the lower end of the existing range.

However, some analysts, including Katsutoshi Inadome from Sumitomo Mitsui Trust Asset Management, raised concerns that the reduction in bond offers may contradict the current monetary policy, wherein the BOJ commits to expanding the monetary base to achieve a 2 per cent inflation target.

(With Reuters Inputs)