Japan’s bond market wants BOJ to purchase more short-term notes

Traders of Japanese government bonds want the central bank to buy more short-term notes and to conduct purchases more frequently, according to Bank of Japan officials after a meeting with market participants.

The attendees said the BOJ should increase buying of one- to-five year notes and suggested smaller purchases at each operation, a BOJ official told reporters yesterday in Tokyo, asking not to be named, citing the central bank’s policy. The average duration of bond purchases now is about seven years, the official said.

The BOJ is trying to steady a debt market where volatility has risen to the highest in four years in the wake of unprecedented monetary easing steps last month. Yesterday’s gathering with bond market participants is the third under the tenure of Governor Haruhiko Kuroda, who last week reiterated a pledge to improve communication on central bank policy.

“The bank has allowed excessive volatility to remain in the JGB market for as much as seven weeks,” Shogo Fujita, the chief Japanese bond strategist in Tokyo at Bank of America Merrill Lynch, one of the 24 primary dealers obliged to bid at government auctions, said before yesterday’s meeting. “The situation doesn’t raise Kuroda’s credibility so far.”

The yield on the benchmark 10-year Japanese government bond jumped to a more than one-year high of 1% last week, even after the BOJ pledged to double bond purchases to end 15 years of deflation in the world’s third-largest economy. Kuroda indicated this week that Japan can weather an increase in yields if it occurs alongside an economic recovery.

Japan’s Topix Index of shares has surged about 60% since the middle of November amid optimism for expanded fiscal and monetary stimulus under Prime Minister Shinzo Abe and Kuroda at the central bank. Even so, rising JGB yields threaten the sustainability of what’s already the world’s largest debt burden and undermine the government’s aim to stoke growth through low borrowing costs.

Excessive Volatility

The five-year JGB yield closed at 0.41% yesterday and earlier this month reached a two-year high of 0.455%. That’s almost five times the record low of 0.095% reached in March ahead of Kuroda’s appointment as governor.

Participants at yesterday’s meeting said increased buying of one-to-five year notes by the BOJ was desirable to reduce volatility, according to the central bank official. The BOJ will release its bond-operation plan for June today, the official said.

Most attendees agreed to a proposal to boost bond-purchase operations to 10 or more per month from 8 times currently, the official said. They didn’t think the BOJ should set a rigid target for bond buying or give notice for each operation as the Federal Reserve does, the official told reporters.

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