Japan must prepare for eventual end to BOJ’s yield cap, says MOF executive

Japan must prepare for eventual end to BOJ's yield cap, says MOF executive

TOKYO : Japan must prepare for the time the central bank abandons its 0 per cent cap on long-term interest rates and when private investors become the dominant player in the government bond market, said a finance ministry executive overseeing debt issuance.

While the Bank of Japan’s (BOJ) massive bond buying may be reducing market liquidity, it has not caused any disruption to the government’s fund raising, said Michio Saito, who heads the ministry’s division charged with issuing Japanese government bonds (JGBs).

“It’s a comfortable situation for us in that we are able to stably issue JGBs at low interest rates, thanks in part to the effect of the BOJ’s monetary policy,” Saito told Reuters in an interview on Thursday.

“But we must bear in mind the BOJ’s current policy won’t last forever. Sometime in the future, it won’t buy as much bonds as it does now, and will no longer peg interest rates at a set level,” he said.

The Ministry of Finance (MOF) must prepare for the time the central bank modifies ultra-low rates, such as by taking steps to enhance liquidity in the JGB market, said Saito, who became director-general of the ministry’s financial bureau in June.

Saito, known as “Mr. JGB” for his expertise in the market, said his division will work on developing market infrastructure for when private investors replace the BOJ as a major player in the JGB market.

The remarks highlight how Japanese policymakers are quietly laying the groundwork for when the BOJ withdraws its massive stimulus, as its counterparts across the globe tighten monetary policy to deal with soaring inflation.

“We’re working closely with the BOJ to ensure the JGB market’s function does not deteriorate too much,” Saito said.

Under its yield curve control (YCC) policy, the BOJ caps the 10-year yield around 0 per cent and offers to buy unlimited amount of JGBs to defend an implicit 0.25 per cent cap around the target.

BOJ Governor Haruhiko Kuroda has repeatedly brushed aside the chance of a near-term exit from ultra-low rates, stressing the need to focus on supporting a fragile economic recovery.

But deputy governor Masayoshi Amamiya, considered a strong candidate to succeed Kuroda when his term ends next April, has said the BOJ must always think about the appropriate means for exiting ultra-easy policy.

After years of massive buying to fire up inflation to its 2 per cent target, the BOJ now owns half of outstanding JGBs in the market.

Mounting upward pressure on yields forced the BOJ to buy a record monthly amount of JGBs in June to defend its yield cap, rolling back years of efforts to taper its huge buying and drawing criticism from investors for distorting market pricing.

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