A recent surge in super-long bond yields reflects the challenges for authorities pursuing a quantitative tightening path. — Bloomberg
TOKYO: The Bank of Japan (BoJ) will probably decide to stop reducing the amount of its government bond purchases in a plan for next fiscal year when authorities gather this month, as they eye a worrisome surge in Japanese Government Bond (JGB) yields, according to a former BoJ board member.
Since last summer, the bank has been reducing its buying of government bonds by 400 billion yen every quarter, but that process will come to a halt, former board member Makoto Sakurai said in an interview Monday.
“They are likely to make a stop,” Sakurai said.
“They must be considering that yields will rise further if they go big on cutting bond purchases.” Sakurai was speaking two weeks before the BoJ extended its current bond purchase plan into the fiscal year from April.
Traders have been looking for hints regarding the likely pace of pullback, with BoJ watchers holding mixed views on what the optimum rate should be.
A recent surge in super-long bond yields reflects the challenges for authorities pursuing a quantitative tightening path.
“It’s probably the most reasonable solution to halt for now and then mull it over later,” Sakurai said.
“It’s a little risky to make a long-term commitment” when uncertainties are this high, he said.
Owing largely to US President Donald Trump’s tariff measures, the murky economic landscape is likely to keep governor Kazuo Ueda’s board on hold, with the policy rate at 0.5%, until toward the end of this year, Sakurai said.
Prior to any move higher, the central bank would need to confirm the resilience in business investment as well as how much room companies have to raise wages next year.
Those data won’t be available until autumn, he said.
Sakurai’s forecast is more or less in line with the market’s.
Traders see around a 70% chance of borrowing costs rising by the end of this year, according to overnight index swaps Monday.
“October seems a bit too early, but I wouldn’t rule it out,” Sakurai said. “It all depends on the data.”
The BoJ’s nine-member board next sets policy on June 17. A key focus will be on whether the central bank will continue to reduce the amount of government debt buying every three months from the second quarter of next year.
At the current pace of cutbacks, monthly bond buying would slide to around 2.9 trillion yen by March.
At the BoJ’s hearings with bond market participants last month, there were diverse views on the right tempo to cut back debt buying in the future.
One participant called for more aggressive cuts to purchases, while another urged that reductions be suspended temporarily, according to minutes of the gatherings released Monday.
The nation’s 30-year yield has come down to around 2.95% from 3.185% hit late last month, its highest since the tenor’s inception.
Still, Japan’s bond market faces more challenges with debt sales yesterday and tomorrow that may ramp up pressure on the government to adjust its borrowing plans and calm investor nerves.
Sakurai expects Japan’s yields to stay elevated, causing concerns at the Finance Ministry over its implications for Japan’s finances. The government’s cost for debt servicing rose to about a quarter of its budget for this fiscal year, thanks partly to higher interest rates.
“They must be feeling that a higher yield could be problematic,” Sakurai said. —Bloomberg
