TOKYO, March 29 (Reuters) - The Bank of Japan’s buying of government bonds hit the lowest level under Governor Haruhiko Kuroda this month, indicating not so much a sign of policy tightening by stealth, but a lack of tools for a central bank that has pursued aggressive monetary easing for years.
The BOJ bought 5.95 trillion yen ($53.76 billion) of Japanese Government Bonds (JGBs) in March, nearly half of its peak of 11.15 trillion yen in November 2014, when the bank’s easing policy was in full swing.
Officially, the BOJ has switched its policy target to bond yields from the amount of bond holdings in 2016, so few market players would see the dwindling buying as a tightening.
“No one will see it as indicative of the BOJ’s policy stance,” said Naomi Muguruma, senior strategist at Mitsubishi UFJ Morgan Stanley Securities.
The BOJ’s holding of outstanding JGBs is nearing 50 percent, compared to just over 10 percent when Kuroda joined the central bank in 2013. Many market players think a reduction in buying is inevitable.
“The BOJ should want to keep its balance sheet increasing, so it will keep buying a bit more in addition to reinvesting maturing bonds,” she said.
The BOJ can keep expanding its balance sheet even if the pace of its monthly purchase slows to around 5 trillion yen, she said.
Over the past year, its bond holdings increased by about 35 trillion yen, the slowest pace since the year to June 2013, contradicting a line in every BOJ’s policy statements in recent years that its buying should aim to increase the holdings by 80 trillion yen annually.
Kuroda has said he will easy policy further if needed, a scenario that looks increasingly realistic as other major central banks turn dovish.
Yet, many market players see Kuroda’s comments as a paper tiger, given the BOJ’s struggle to achieve policy commitments.
While there are possible options, including pushing interest rates deeper into negative, increasing its stock buying and strengthening its forward guidance, all of them come with drawbacks.
Cutting rates further would damage banks that have been smarting from many years of negative rates and low bond yields while increasing ETF purchases could lead to a shortage of stocks to buy, as the BOJ is already among the biggest buyers in Japanese markets.
Committing to keep an easing policy for a longer period would do little when the JGB yield curve is already pricing in near-zero interest rates ten years out.
($1 = 110.68 yen)
Reporting by Hideyuki Sano; editing by Darren Schuettler