THE Bank of Japan (BOJ) is broadly expected to discuss cutting bond purchases at a policy meeting ending on Friday (Jun 7), with some investors expecting the central bank to also lay the groundwork for raising interest rates next month.
Governor Kazuo Ueda and his fellow board members will keep the policy rate in a range between 0 and 0.1 per cent at the end of their two-day gathering, according to all but one economist surveyed by Bloomberg. A majority predicts the board will opt to cut bond purchases from around six trillion yen (S$51.6 billion) per month.
Sources familiar with the matter said earlier this month that the BOJ will probably consider whether the timing is appropriate to reduce the pace of bond buying.
A paring back of bond purchases would mark the BOJ’s first clear step towards quantitative tightening after pivoting away from its massive stimulus programme in March and embarking on a path to policy normalisation. While the bank said it doesn’t target foreign exchange rates, a shift in debt purchases or a clear hawkish signal would also likely help ease persistent pressure on the yen.
Ahead of the BOJ meeting, US data due on Wednesday are expected to show inflation slowed month on month in May. Hours after that release, the Federal Reserve is widely expected to keep its benchmark rate steady, with investors focusing on whether chair Jerome Powell signals less scope for rate cuts later in 2024 after jobs data last week soundly beat consensus estimates.
“The BOJ is in a tough spot,” said Izuru Kato, chief economist at Totan Research. “The scale of bond buying is still massive. If they are too cautious about cutting it, that could push the yen lower. At the same time, bond yields could rise sharply if they are too aggressive.”
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Ueda’s task of striking the right balance comes with higher pressure than usual this time. At his post-meeting press conference in April, the governor’s comments conveyed little sense of urgency over the yen. Japan’s currency slipped to a fresh 34-year low in the aftermath, prompting the finance ministry to conduct its biggest currency intervention on record.
“Ueda will shake politicians’ confidence in him if he does nothing at all to prevent the yen’s weakness from accelerating after his last press conference quickened the currency’s fall,” said Yuichi Kodama, chief economist at Meiji Yasuda Research.
The yen weakened on Monday to around 157 per US dollar, following the US jobs data last week.
While the BOJ has said it no longer considers bond buying a monetary policy tool, market players are increasingly focused on its regular bond operations, particularly after the central bank rattled the market on May 13 by reducing its buying. The bank then faced a shortage of sellers in its operation on May 23 for the first time since 2013, an outcome that suggests supply and demand conditions in the market are ripe for a paring back of purchases.
Bond redemptions this year are likely to reach 71.4 trillion yen, meaning that purchases below 5.95 trillion yen per month would result in a falling trend in the BOJ’s bond holdings, an outcome consistent with quantitative tightening, according to Taro Kimura at Bloomberg Economics.
“Expect the BOJ to announce it will start reducing JGB purchases. That shouldn’t come as a shock – it has long flagged its willingness to shrink its balance sheet,” he said.
A wide range of Japanese bond yields have risen to the highest levels in a decade in recent weeks. Some analysts call for more central bank guidance on bond buying after the March end of the bank’s yield curve control programme. As a result of its large-scale easing since 2013, the BOJ owns more than half of Japan’s outstanding public debt.
The BOJ has a variety of options for trimming its bond buying. Some surveyed economists expect the bank to slow the pace by one trillion yen per month while others say the reduction could be smaller at the start. Some hold the view that the BOJ will merely unveil a plan outlining its blueprint for cutting bond buying in the coming months.
Owing to the persistence of a weak yen, expectations are rising that the BOJ will raise its policy rate in July after the bank’s first rate hike in 17 years in March. BOJ watchers will be watching for any hints of an early rate move at this week’s meeting.
One-third of the 51 surveyed economists said they now expect a rate move in July, compared with 19 per cent who held that view when surveyed in April. The proportion expecting officials to wait until October dropped to one-third from 41 per cent. Only one economist predicts a rate increase this week.
“Ueda will probably take a stance of not ruling out a rate hike in July,” said Ryutaro Kono, chief Japan economist at BNP Paribas. “But if he sounds too willing to do that, that could invite a surge in yields coming together with the bond buying reduction, so I expect Ueda’s remarks to be balanced.” BLOOMBERG
