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BoJ's reduced bond investment may have global impact

BoJ's reduced bond investment may have global impact

All eyes are on the Bank of Japan (BoJ) and possible policy tweaks this week, but its recent reduction in longer maturity debt purchases may already be having an impact on global bond markets.

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By Charles Bliss 30.07.2018

All eyes are on the Bank of Japan (BoJ) and possible policy tweaks this week, but its recent reduction in longer maturity debt purchases may already be having an impact on global bond markets. 

With the BoJ set to convene for its much-anticipated meeting on Monday, market watchers continue to argue about whether it will change course and adjust its ten-year yields target.

However, Japanese investors are likely to be thinking about bringing more capital back home right now due to rising hedging costs overseas and the fact that the BoJ bought fewer bonds and slowed its annual debt holdings increase to JPY ¥44.1trn. This is considerably less than the ¥80trn guidance.

"The BoJ is likely to cut bond purchases more drastically and more flexibly, which targets the super-long sector, to revive market liquidity and volatility,” said Jun Ishii, Mitsubishi UFJ Morgan Stanley Securities Chief Fixed-Income Strategist. "Once the 20- or 30-year yields approach 1%, funds that are taking a temporary shelter in foreign bonds will come back.''

The central bank reduced the number of bond purchases with 25-year yields by 7.6% during the second quarter according to official data, while it modestly increased its spend on shorter maturities. Meanwhile, Japan Post Insurance said back in April that JGBs would become more viable when 30-year yields are in excess of 1%. The figure on Friday was 0.815%, a considerable increase on the 0.685% figure from the previous week.

The BoJ’s 30–31 July meeting has been a hot topic for analysts and investors recently, with reports claiming that officials want to curb spillover from the current yield-curve control policy. This speculation led to a rise in longer maturity yields last week and had an impact on debt markets in other regions, including Australia and Europe.

However, the 44 economists polled by Bloomberg two weeks ago all agreed that the central bank will remain steadfast to current yield curve control and asset purchase settings. If there are changes, then the BoJ may give more leeway in its 0% target or alter the description of guidance for its ¥80trn bond holding.

“If the BoJ were to make changes to yield-curve control, the spillover effects through global rates would be pretty significant," Richard Kelly, Toronto-Dominion Bank Head of Global Strategy said.

BoJ data shows that Japanese investors own US bonds worth more than USD $1trn and have significant holdings in Spain, France and Italy. However, the costs of currency hedging have increased recently, prompting Japanese funds to ease their spend in overseas markets. The US is now more expensive after the Federal Reserve tightening policy to increase short-term interest rates.

Local investors are likely to increase investment in JGBs if the BoJ does permit Japanese bond yields with longer maturities to rise, according to NLI Research Institute Senior Economist Tsuyoshi Ueno, who claimed that “investors will be delighted” due to the current costs challenges of hedging in the US.

While speculation about the BoJ’s meeting continues, some analysts claim that any changes may not have a notable impact on global debt markets. “The crux of the arguments is how the BoJ can improve the sustainability of its stimulus to continue it for a longer time," Sumitomo Mitsui Asset Management Chief Macro Strategist Masayuki Kichikawa said.

He predicted that Japan's long-dated yields will remain in a low range, claiming that a technical alteration of 10 to 20 basis points would not be significant enough to modify portfolio flows.

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