The Bank of Japan will face off with market participants at a key meeting this week aimed at setting a realistic pace for plans to reduce its bond purchases due to be announced later this month.
The Bank of Japan's Financial Markets Department will hold three meetings with representatives of banks, securities firms and bond buyers for financial institutions. Each meeting will last an hour, with the last meeting on Wednesday. Any numbers presented at the hearing will be closely scrutinized by the market, but they are unlikely to come from the central bank.
Bank of Japan officials are more interested in listening to market opinions than discussing specific plans to reduce bond purchases, according to people familiar with the matter. Market participants may also be reluctant to have a frank exchange of views with the Bank of Japan in front of their competitors.
Still, by holding the meetings, the BOJ arguably gave market participants a chance to express their opinions as it assesses how to reduce its presence in the bond market as quickly as possible before announcing its plan on July 31.
“The BOJ probably already has some plans,” said Naomi Muguruma, chief fixed-income strategist at Mitsubishi UFJ Morgan Stanley Securities Co. “It wants to show its cautious stance by holding the meeting.”
The Bank of Japan has long been seen as the "whale" in the JGB pond because it squeezed other buyers out during its more than a decade-long aggressive quantitative easing program, during which time the central bank grabbed more than half of Japan's outstanding government bonds, creating the potential for its quantitative tightening initiatives to make huge waves in the market.
The BOJ board decided to slow the pace of bond purchases at its policy meeting last month. BOJ Governor Kazuo Ueda said he wanted to formulate the plan carefully and believed that the opinions of market participants should be heard before finalizing the conclusion.
“These two days will be crucial,” said Yuuki Fukumoto, senior financial researcher at NLI Research Institute. “It will be key for the BOJ to listen and gather information on how much more bond buying the market can do to ease its concerns.”
Bank of Japan watchers predict the central bank will first reduce its monthly bond purchases to around 5 trillion yen ($31 billion) from the current 6 trillion yen, according to a Bloomberg survey late last month. They expect the pace to slow to 3 trillion yen in two years.
Ueda said at a post-meeting news conference on June 14 that the size of the reduction would be "significant," but declined to elaborate. Takahide Kiuchi, a former BOJ board member, said Ueda's comments suggested the reduction would be larger than expected in the first round.
Kiuchi Takahide said that Ueda must have known that the 5 trillion yen figure had been circulating for some time before he made this statement, so it could even be as low as 3 trillion yen.
Some analysts believe that if the Bank of Japan's aggressive stance on quantitative easing materializes, a larger-than-consensus reduction in bond purchases could help ease pressure on the yen, which has fallen to a 38-year low this month, fueling views that the Bank of Japan wants to avoid further dovish signals.
While some economists polled expect the BOJ’s bond purchases to eventually fall to zero, former BOJ executive director Atsushi Miyanoya said that “will never happen.” The BOJ was already buying nearly 2 trillion yen of bonds a month to stabilize markets before launching its massive monetary easing program in 2013.
The Bank of Japan ended its massive easing policy in March but decided to continue buying roughly the same amount of bonds to avoid sparking shocks in financial markets.
The Bank of Japan's 585 trillion yen bond portfolio exceeds the size of the world's fourth-largest economy, which is an important reason why bond investors must be highly vigilant about the Bank of Japan's next move.
The article is forwarded from: Jinshi Data
