Japan Post bond sales seen facilitating BoJ stimulus expansion

The biggest holder of Japan's government bonds after the central bank is making it easier for Governor Haruhiko Kuroda to bolster his unprecedented note-buying programme by releasing the equivalent of about $48 billion of debt into the market.

Japan Post Bank, a unit of state-owned Japan Post Holdings Co, announced last week it plans to reduce its investment in JGBs, municipal bonds and other government-related debt to 111.6 trillion yen ($938 billion) by the end of the fiscal year that began April 1, from an estimated 117.3 trillion yen as of March 31. The bank said it plans to increase its stakes in stocks and foreign bonds, in line with Kuroda's target of stoking demand for riskier assets.

The sales would help replenish supply in a market where the Bank of Japan's 12 trillion yen of purchases each month represent more than 90 per cent of debt offered to investors. It also provides additional ammunition for policy makers to expand easing as they struggle to achieve their 2 per cent inflation target. Two-thirds of economists surveyed by Bloomberg predict an expansion of stimulus by the end of October.

"It's really tough for the Bank of Japan to increase its holdings of JGBs by 80 trillion yen per year," said Hidenori Suezawa, a financial market and fiscal analyst at SMBC Nikko Securities Inc in Tokyo. "This is a win-win situation for the central bank and Japan Post."

Flat prices
The BoJ remains far from achieving its target for the cost of living, even as it said its bond holdings had swollen to a quarter of outstanding debt at the end of 2014. Its preferred consumer price gauge flatlined in February from a year earlier when stripped of the effects of an April sale-tax increase.

Central bank policy makers begin a two-day meeting Tuesday, with all 34 economists in a Bloomberg poll predicting they will maintain the status quo. Three respondents predicted additional easing at the April 30 gathering, while the most popular choice among those predicting further stimulus was October 30.

Bond investors voiced concerns about low liquidity and higher volatility in a meeting with Ministry of Finance officials last month. After falling to a record low of 0.195 per cent in January, the yield of the 10-year sovereign note rebounded to an almost four-month high of 0.47 per cent in March, before reaching 0.34 per cent as of 6 pm in Tokyo Monday. Expectations for price swings for debt over a 60-day period soared to the highest in more than 11 years on March 27.

Asset Shift
Japan Post is the latest to announce it will shift its portfolio away from domestic bonds, putting 14 trillion yen into risk assets over the next three years.

The $1.2 trillion Government Pension Investment Fund pledged in October to reduce its holdings of JGBs by about half, while almost doubling its weighting for domestic stocks to 25 percent. Smaller pension funds matched those targets this year.

The Topix index of Japanese stocks climbed to its highest close since 2007 on March 23.

"Because Japan Post has already built up its holdings of foreign bonds, the bulk of the 14 trillion yen of riskier assets it plans to buy over the next three years will be stocks," said Shuichi Ohsaki, a Tokyo-based rates strategist at Bank of America Corp. "That should play a role in supporting the domestic stock market."