BOJ to provide bond buying guidance after YCC conclusion

BOJ bond guidance: Bank of Japan (BOJ) is poised to begin offering specific guidance on its government bond purchases as it prepares to phase out its negative interest rates and yield curve control (YCC) policy, sources told Reuters. This move aims to mitigate market disruptions during the transition away from current monetary measures.

Given the prolonged period of inflation exceeding the BOJ's 2 per cent target, market analysts anticipate the BOJ to lift short-term interest rates out of negative territory either in the upcoming week or by April.

Upon the cessation of negative rates, the BOJ is anticipated to abandon YCC, which has been instrumental in steering the 10-year bond yield to around 0 per cent with a flexible cap of 1 per cent. However, to curb excessive increases in long-term interest rates, the BOJ is expected to introduce guidance regarding the pace of its bond purchases.

Yield stability plan

The BOJ may continue to engage in government bond purchases to a certain extent and provide guidance to preempt abrupt spikes in yields. This guidance mechanism could manifest in the form of a loosely defined quantitative target.

Currently, the BOJ refrains from specifying a target for its bond purchases but maintains a monthly buying volume of approximately 6 trillion yen ($40.7 billion) to attain its yield target.

The central bank is projected to uphold a similar pace of bond acquisitions after exiting YCC and is likely to avoid reductions in the volume in the near term.

In its endeavour to stimulate economic growth and attain the 2 per cent inflation target, the BOJ initiated a sizable asset-purchasing program in 2013. However, as inflation remained below target levels, the BOJ introduced a 0.1 per cent charge on financial institutions' excess reserves in 2016 under its negative rate policy, alongside the implementation of YCC.

BOJ rate target

Following the cessation of negative rates, the BOJ is anticipated to designate the overnight call rate as its new policy target. By offering 0.1 per cent interest on reserves held with the central bank, the BOJ aims to guide the overnight call rate to hover around zero.

While market observers await clarity on the timing of future interest rate hikes, uncertainties over the economic outlook may deter the BOJ from providing explicit guidance on the timeline for such actions.

BOJ Governor Kazuo Ueda has stressed the focus on maintaining accommodative monetary conditions even post the cessation of negative rates, aiming to ensure a seamless transition from the current ultra-loose policy.

Any forthcoming guidance on the BOJ's future policy trajectory is anticipated to align with these assurances.

(With Reuters Inputs)