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Japan's central bank trims bond purchases, prompting taper talk

Reuters  |  TOKYO/HONG KONG 

TOKYO/(Reuters) - Speculation the of may wind back its monetary stimulus this year gripped markets on Tuesday after the central trimmed the amount of its purchases of Japanese bonds.

Traders appeared to latch on to the BOJ announcement that it will buy less of the long-dated bonds, sending the dollar down about 0.5 percent against the and the longer dated 20- and 40-year yields up to their highest in a month.

While the move was in line with the BOJ's subtle reduction in its buying, the so-called 'stealth tapering', traders said it highlighted how sensitive markets are to a pullback in the massive stimulus that has been the centre piece of Shinzo Abe's 'Abenomics' policies of the past 4-1/2 years.

"This goes to show that the amount of attention being given to the word 'tapering,' or any action from the BOJ in that direction that could be taken as a suggestion of it, there's a lot of sensitivity around it," said Bart Wakabayashi, for State Street in

BOJ has repeatedly dismissed the chance of withdrawing stimulus any time soon, even as some policymakers have recently expressed concerns over the perceived demerits of monetary easing, especially the hit on financial institutions' profit margins.

That has led to speculation that the central may have to consider raising its yield targets or slow purchases of risky assets later in 2018 and bringing in line with a host of developed nations which have started to tighten policy, partly thanks to a synchronized uptick in global growth.

The Federal Reserve raised rates three times last year, while the of Canada tightened policy for the first time in seven years and the European Central has signalled it could start to taper soon.

The BOJ pledged in 2016 to guide short-term interest rates at minus 0.1 percent and 10-year yields at around zero percent.

It also keeps a loose pledge to increase its holdings at 80 trillion ($710.29 billion) per year, although the actual increase was only around 58 trillion last year, which some investors see as an effective tapering of the BOJ's stimulus.

On Tuesday, markets were surprised by the central bank's decision to reduce its purchases of JGBs with 10 to 25 years left to maturity as it was the first cut in that tenor in more than a year.

In all, the BOJ cut buying of 10 to 25 year bonds and 25 to 40 year paper by 10 billion ($88.39 million) each, from its previous operations, to 190 billion and 80 billion respectively.

The announcement pushed the dollar to a session low of 112.50 yen, down around 0.5 percent on the day.

In the Japanese market the selloff was more measured, with yields on 20-year to 40-year paper rising to one-month highs but still well below last year's peaks.

"While it has become difficult to bid up JGBs, there's no reason to sell JGBs considering that the BOJ is highly unlikely to change its policy at least until it will have a new leadership in April," said Ryoko Tada, fixed at

None of the bank's current nine policy board members has proposed any reduction in stimulus. One has even proposed a further easing.


Since it adopted the yield curve control policy in 2016, the BOJ has tweaked its operations more than 10 times.

BOJ officials say any changes are fine-tuning meant to keep yields in line with its policy goal and not to telegraph hints on its future policy.

Some analysts say the inconsistency of the two policy targets requires a change of tack from the BOJ - a call the BOJ has shrugged off for many months.

"It's better to use the upcoming Jan. 23 meeting to tweak the policy - with a fresh balance sheet target at 40 trillion yen," analysts said in a note.

The difficulty is that inflation remains far off the BOJ's 2 percent target. Slow wage growth is one of the challenges.

Data on Tuesday showed Japan's real wages, which are adjusted for inflation, posted their first gain in 11 months in November, helped by a rise in year-end bonuses. But the increase was just 0.1 percent and economists warn that wages are unlikely to keep up with general price increases, which could hurt consumption.

"Regular pay is set to strengthen only slowly ... the of Japan's 2 percent inflation target won't be reached anytime soon," said Marcel Thieliant, senior at

($1 = 112.6300 yen)

(Reporting by markets team; Writing by Marius Zaharia; Editing by Shri Navaratnam)

(This story has not been edited by Business Standard staff and is auto-generated from a syndicated feed.)

First Published: Tue, January 09 2018. 13:47 IST