Bank of Japan sounds out market players before finalising bond-buying cuts

THE Bank of Japan (BOJ) will speak face-to-face with market participants over the next couple of days in key meetings aimed at gauging a realistic pace for a reduction of its bond purchases to be announced later this month.

The central bank’s financial markets department will host three gatherings with representatives from banks, securities firms and those buying bonds for financial institutions. Each session will last an hour, with the final meeting taking place on Wednesday (Jul 10).

Any numbers floated in the hearings will bear close scrutiny, but they are unlikely to come from the central bank. BOJ officials are more interested in hearing market views than building discussions around specific options for the reduction of bond purchases, according to sources familiar with the matter.

Market participants may also be reluctant to share candid opinions with the BOJ in front of their competitors.

Still, by holding the meetings the bank can say it gave participants in the market a chance to convey their views as it assesses how quickly it can reduce its presence in the bond market ahead of the unveiling of its plans on Jul 31.

“The BOJ likely has some plans already,” said Naomi Muguruma, chief fixed-income strategist at Mitsubishi UFJ Morgan Stanley Securities. “What it wants to show is a stance of proceeding cautiously by hosting the gatherings.”

The BOJ has long been characterised as the whale in the pond of Japanese government debt as it pushed other buyers out of the water during an aggressive quantitative easing programme that lasted more than a decade. During that time the bank scooped up more than half of Japan’s outstanding government bonds, creating the potential for its quantitative tightening moves to have major ripples in the market.

Governor Kazuo Ueda’s board decided to slow the pace of bond buying at a policy meeting last month. The BOJ chief said he wanted to construct the plan carefully and that it merited hearings with market players before it was finalised conclusion.

“These two days are going to be critical,” said Yuuki Fukumoto, senior financial researcher at NLI Research Institute. “For the BOJ, the key point is to hear and gather information on how much more bond-buying the market can take to assuage its concerns.”

According to a Bloomberg survey late last month, BOJ watchers predict the central bank will start by reducing its monthly purchases to around five trillion yen (S$42 billion) from the current six trillion yen. They expect that pace to slow to three trillion yen in two years.

Ueda said the size of the reduction would be “sizeable” while declining to elaborate further at a post-meeting press conference on Jun 14. Takahide Kiuchi, a former BOJ board member, said Ueda’s comments implied the reduction would be bigger than the expected first cut.

“Ueda must have been aware that the five trillion yen figure has been doing the rounds for a while before he made that remark,” Kiuchi said. “So it could even be as low as three trillion yen.”

A larger cut than consensus may help ease pressure on the yen by crystalizing the BOJ’s aggressive stance on QT, according to some analysts. The yen weakened to a 38-year low this month, fuelling views that the bank will want to avoid any further dovish signals.

While some economists surveyed expect the bank’s purchases to eventually fall to zero, Atsushi Miyanoya, a former BOJ executive director, said there is “absolutely no chance” of that happening. The bank already bought close to two trillion yen of bonds per month to stabilise the market before it kicked off a massive monetary easing programme in 2013.

The BOJ ended its large-scale easing in March but decided to keep buying roughly the same amount of bonds to avoid triggering shockwaves in financial markets.

The central bank’s 585 trillion yen pile of bonds is bigger than the size of the world’s fourth-largest economy and a key reason bond players must be on a high alert for the BOJ’s next move. BLOOMBERG