The Bank of Japan seeks to reduce its presence in the bond market. The size of its proposed purchases of government bonds in regular operations fell on Monday from April 24.
The move could put upward pressure on Japanese government bond yields, potentially narrowing the huge interest rate differential between Japan and the United States that is unfavorable to the yen.
Benchmark 10-year JGB yields rose immediately after the Bank of Japan announced the news. The yen recovered its earlier losses.
The 30-year JGB yield also hit its highest level since 2011 at 2.03% in late trading.
The Bank of Japan said it would purchase 425 billion yen ($2.7 billion) of 5-10-year government bonds. The corresponding purchase scale last month was 475.5 billion yen.
The latest purchase size remains within the planned range for the current quarter.
This is the first time the Bank of Japan has reduced purchases since late December last year.
Period (year) Purchase today (100 million yen) Purchase before (100 million yen) Second quarter plan range (100 million yen) 1-337503752 (May 7) 3000-45005-1042504755 (April 24) 4000- 550010-2515001507 (May 7) 1000-2000 The Bank of Japan’s reduction in purchases was a surprise. This may help boost yields, said Takahiro Otsuka, senior fixed income strategist at Mitsubishi UFJ Morgan Stanley Securities.
It\’s hard not to see the move as a response to the yen\’s recent weakness, which could see more volatility in bond markets.
Bank of Japan Governor Kazuo Ueda said in March that the bank\’s new path is to use short-term interest rates as the main policy tool, rather than using bond purchase operations or central bank bond positions.
The summary of the views of the Bank of Japan\’s April policy meeting released last week showed that policy committee members are paying close attention to the impact of the depreciation of the yen on inflation and expect that the pace of interest rate hikes may accelerate as a result. This has boosted expectations that the bank will raise interest rates earlier and Speculation on reducing the scale of bond purchases.
The Bank of Japan appears to be under pressure from the government to take action in response to the yen\’s fall and loose financial conditions, said Shoki Omori, a strategist at Mizuho Securities in Tokyo.
However, its impact will be limited because investors are prepared for this after the release of the summary of views of the Bank of Japan\’s April policy meeting.
After the news of the reduction in bond purchases was announced, the yen, which had previously fallen 0.1%, recovered its losses against the U.S. dollar and remained stable at 155.81; 10-year Japanese bond futures expanded their losses.
Japan\’s benchmark 10-year yield rose 4 basis points to 0.94% on Monday, heading towards a ten-year high of 0.97% hit in November.
Continued yen weakness comes as BOJ scales back routine bond purchases
The Bank of Japan seeks to reduce its presence in the bond market, proposing to buy government bonds in regular operations on Monday, down from April 24.
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