TOKYO, March 26 (Reuters) – The Bank of Japan will take a more hands-off approach in bond buying operations from April under new guidelines set last week, sources familiar with its thinking said, as it seeks to breathe life back into a market made dormant by its huge presence.
The new approach will be clarified in a schedule of the BOJ’s bond-buying operations for April due to be released on Wednesday, which has become the focus of market attention for hints to how much the bank will tolerate fluctuations in yields.
“The BOJ was very meticulous in responding to yield moves up till now. That will end,” said one of the sources, expressing a view echoed by two other sources.
All spoke on condition of anonymity as they were not authorised to speak publicly.
In a review of its policy tools announced on Friday, the BOJ said it would allow 10-year bond yields to fluctuate within a 50-basis-point range around its target of 0%.
The bank also said that from its bond-buying schedule for April, it would indicate the amount of bonds it purchases for each maturity as a specific number, rather than in a range.
Indicating a range had allowed the BOJ to step in frequently to smooth any swings in yields, a practice it will discontinue to allow market forces to drive moves more, the sources said.
Setting a specific number also gives markets predictability regarding how much the BOJ will buy at each operation, and keep investors from focusing too narrowly on its moves, they added.
“The BOJ won’t create volatility with its market operations,” another source said, signalling that any tweak to the size of monthly bond buying will be modest.
“But it also won’t get in the way of fluctuations that reflect fundamentals, as long as yields stay within the 50-point range.”
With the COVID-19 crisis hurting the economy and the cost of prolonged monetary easing growing, the BOJ is forced to chase two conflicting goals: keep borrowing costs low in a stable fashion, while tolerating more fluctuations in the bond market.
BOJ officials have stressed the priority was to keep the entire yield curve “stably low,” a sign that they will not tolerate any rise in 10-year yields above 0.25%.
Markets took the cue, with the 10-year Japanese government bond (JGB) yield drifting lower and standing at 0.08% on Friday, off its latest peak of 0.175% hit last month.
While the BOJ’s long-term goal could be to steepen the yield curve and taper its bond buying, many analysts expect it to hold off from sharp cuts in bond buys in coming months.
“There are a lot of external factors that could drive up JGB yields, such as pressure from rising U.S. Treasury yields,” said Mari Iwashita, chief market economist at Daiwa Securities.
“If so, there’s no reason for the BOJ to slow bond purchases drastically and cause market turbulence now.”
Others are more cautious, however.
“Deep down, the BOJ probably wants to gradually reduce its bond buying because it had been buying too much in the past,” said Masahiko Loo, portfolio manager at AllianceBernstein Japan.
“A reduction in bond purchases may not come next month, but could happen down the road.”
(Reporting by Leika Kihara; Additional reporting by Daiki Iga; Editing by Clarence Fernandez)