BOJ March plan would taper bond buying by 18 percent

Bloomberg

The Bank of Japan’s bond-purchase plan for March puts policy makers on track to miss an annual target, leaving investors debating whether they’re witnessing a stealth tapering.
Calculations based on the plan released Feb. 28 suggest a net 66 trillion yen ($575 billion) of purchases if the March pace were to be sustained over the following 11 months. That’s 18 percent less than the official target of expanding holdings by 80 trillion yen a year.
The BOJ could — and probably will — vary its buying in an endeavour to anchor borrowing costs for 10-year bonds at around zero percent. Yet, holding onto both the targets for quantitative easing and yield-curve control has left investors scouring the central bank’s daily purchases to see whether the balancing act is achievable.
“If the BOJ was simply to reduce its annual target, it would probably have to do so over and over again, which would clearly look like tapering,” said Naomi Muguruma, a senior market economist at Mitsubishi UFJ Morgan Stanley Securities Co. in Tokyo. If the appearance of tapering isn’t what the Japanese central bank wants, it could replace its 80 trillion yen annual target with one for monthly purchases at its July 19-20 meeting, she said.
The central bank may buy 8.9 trillion yen of bonds in March, based on the midpoint of ranges supplied in the operation plan. Maintaining that pace for 12 months will see it accumulate about 107 trillion yen of debt. At the same time, 41 trillion yen of existing holdings will mature, leaving it with a net increase of 66 trillion yen.
The March plan indicates the BOJ may acquire 1.5 trillion yen of bonds due in more than 10 years, down 32 percent from the level in January 2016 when it introduced its negative rate policy. For one-to-five-year notes, the projection is for an 8.6 percent decline, whereas the central bank will be buying roughly the same amount of five-to-10-year notes.
The step-back from buying super-long bonds, those with more than 10 years to maturity, comes after Governor Haruhiko Kuroda and his colleagues said in September that an “excessive” decline in the yields has placed a heavier burden on companies seeking to meet pension
obligations.
While the BOJ board is projected to keep policy unchanged at its March 15-16 meeting, a shift to a range for the 10-year yield target may come under consideration at some point, according to people with knowledge of discussions at the central bank.
With oil prices higher than a year ago and a relatively weak yen, central bank officials expect consumer prices to rise 1.5 percent in the fiscal year ending March 2017, their latest forecast shows.
The expected pick-up in inflation and rising U.S. Treasury yields have put pressure on the BOJ’s yield-curve control policy. The central bank offered to buy an unlimited amount of five-to-10-year bonds at a fixed rate on Feb. 3 after borrowing costs surged to the highest in 12 months.
“Given the BOJ is committed to managing the yield curve, any upward pressure on yields could lead to an increase in bond purchases in the future,” said Yusuke Ikawa, Japan strategist at BNP Paribas SA in Tokyo. “If it maintains its zero percent target, the BOJ faces the risk of one day having to buy more than 80 trillion yen of bonds a year.”