BOJ likely to trim super-long bond buying in Q4

The Bank of Japan is likely to slightly reduce its purchases of super-long government bonds in the fourth quarter despite recent rises in yields for those maturity zones, said three sources familiar with its thinking.

Any such move would be in line with market expectations and the central bank’s guidance that it will prioritise tapering JGB maturity zones for which the ratio of its holdings against total issuance remains high.

The BOJ will make a final decision on Sep 30, which could be swayed by the outcome of a 20-year government bond auction on Sep 17 and the degree of market volatility in super-long Japanese government bond (JGB) yields, they said.

If the BOJ were to reduce buying in super-long JGBs, it will be the second time since a cut made in the second quarter.

In July-September, it left unchanged the monthly purchase amount for JGBs with more than 10 years and up to 25 years until maturity, at 405 billion yen (S$3.53 billion).

As a result, the ratio of the BOJ’s purchases against total issuance for that zone stood at 50.6 per cent, sharply higher than 40.4 per cent for JGBs with 5-10 years until maturity.

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The BOJ is unlikely to make any change to the purchase amount for JGBs with more than 25 years until maturity, at 150 billion yen per month.

As part of its efforts to phase out a massive, decade-long stimulus, the BOJ began tapering its government bond buying last year and is now reducing purchases by 400 billion yen per quarter.

While the BOJ still holds roughly half of outstanding JGBs, its diminishing presence has made the market more susceptible to swings particularly at the long end of the yield curve.

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Yields on long-dated JGBs have risen partly on concern about Japan’s worsening finances. Prime Minister Shigeru Ishiba’s announcement on Sunday that he will step down has opened up the chance of a new administration more keen to ramp up spending.

The 20-year JGB yield rose to 2.67 per cent on Monday, before falling to 2.635 per cent on Tuesday. The 30-year yield hit an all-time high of 3.285 per cent before sliding to 3.245 per cent on Tuesday. REUTERS