Japan plans linker buybacks to match first new issue in 5 years

Japan's government plans to buy back an additional 300 billion yen ($3 billion) of inflation-linked bonds next month when it sells the same amount in a new issue, the first in five years, according to Ministry of Finance officials.

Institutional investors in the Japanese government bond market see "no problem" with the plan, the officials told reporters on condition of anonymity, following a meeting with the group on Wednesday in Tokyo. The 300 billion yen in buybacks will be in addition to the 20 billion yen in so-called linkers the ministry regularly purchases each month.

Japan's plan to reissue linkers on October 8 is a signal of Prime Minister Shinzo Abe's resolve to spur growth in consumer prices and the economy. The government stopped selling the notes in August 2008 as deflation damped demand.

The government will have two offerings worth 300 billion yen each in 10-year linkers, with the second taking place in January, the ministry said in June. The notes will have guaranteed minimum prices, a backstop that previously issued linkers didn't have, leaving them vulnerable to price declines as deflation deepened.

Japan's five-year breakeven rate, derived from the difference between government bond yields and those on inflation-linked debt, was at 1.2 percentage points on Wednesday. That's down from a 1.89 reading on May 23 that was the most on record going back to 2009.

Inflation pledge
Abe has pledged to defeat 15 years of deflation and spur growth in the world's third-largest economy using the so-called three arrows of fiscal stimulus, monetary easing and a package of growth-oriented initiatives including deregulation.

The monetary side of the equation is being pursued by the Bank of Japan, which in April boosted its monthly JGB purchases to more than 7 trillion yen as part of a plan to double the money supply by the end of 2014. The BoJ offered to buy 600 billion yen of government securities on Wednesday, its fourth purchase operation so far in September.

Those purchases have helped preserve JGBs from a selloff in global debt markets in the past few months.