December 15, 2017 / 11:01 AM / in 6 months

Japan to cut JGB sales to market, leaving BOJ with less debt to buy: sources

TOKYO (Reuters) - Japan is planning to slash the amount of government bond sales to the market by about 7 trillion yen to around 134 trillion yen ($1.2 trillion) in fiscal 2018 from the current year, government sources told Reuters on Friday.

This would be the biggest cut in 11 years and mark the fifth straight year of reduction in the amount of government bond (JGB) sales through auction. The government plans to sell 141.2 trillion yen of JGBs for the current fiscal year ending March.

The amount of next year’s JGB sales via auction would be the lowest since fiscal 2009, the sources said on condition of anonymity as the plan has not been finalised yet.

It will be finalised on Dec. 22 when the government is expected to endorse its draft annual budget for fiscal 2018.

Declines in the amount of JGB sales via auction leave the Bank of Japan with less debt to buy.

The central bank has been quietly slowing its purchases in what analysts call “stealth tapering” since it switched its target last year to interest rates from the pace of money printing under its yield curve control policy.

Cuts in JGB issuance tighten the supply-demand tension in the market, which will in turn lower interest rates, leading the BOJ to further reduce JGB purchases, some analysts say.

“As a result, the plan will help the BOJ proceed with stealth tapering, although it’s unclear whether the finance ministry has such intention,” said Katsutoshi Inadome, senior bond strategist at Mitsubishi UFJ Morgan Stanley Securities.

Prime Minister Shinzo Abe’s administration is leaning toward cutting the amount of new debt issuance as well as government bonds used to roll over the existing bonds, or refinancing bonds.

Government officials contacted by Reuters declined to comment on the plans for cutting bond issuance.

The government in recent years has shifted to increase issuance of super-long JGBs while reducing those of shorter maturities to lock in benefits from the BOJ’s massive monetary stimulus, which keeps long-term interest rates low.

Now the government is set to cut issuance of 30-year and 40-year JGBs as well as 10-year, 5-year, 2-year JGBs and discount treasury bills in the next fiscal year, the sources said.

Taking demand such as by institutional investors into account, the government is set to maintain the amount of 20-year JGBs and inflation-linked bonds while increasing the number of auctions for enhanced liquidity, they said.

The latest move towards cutting 30-year and 40-year JGBs is due to widening differentials between coupon rates and long-term interest rates under the BOJ’s negative interest rate policy. Widening rate differentials cause government income to overshoot the face value of these super-long JGBs.

The actual amount of JGBs issued through auction tends to deviate upwards due to the central bank’s aggressive monetary stimulus.

($1 = 112.2700 yen)

Writing by Tetsushi Kajimoto; Editing by Shri Navaratnam

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