After its decision to allow bond yields to move in a more flexible range, the Bank of Japan (BOJ) announced plans to reduce the total amount and frequency of its bond purchases.
BOJ will buy short and long-dated bonds four times in April this year as compared to five times in March, down 9% on a monthly basis to $53.33 billion.
Earlier in March, the central bank announced a range of steps in a move to make its ultra-loose monetary policy more flexible. It was the first three-month policy framework review since 2016.
Governor Haruhiko Kuroda said that the BOJ left unchanged its 0% target for 10-year bond yields, but the range of 10-year Japanese government bond (JGB) yield fluctuations would be between around +/- 0.25% from the target level, compared to previous +/- 0,20%.
BoJ controlled both short and long-term interest rates, inducing short-term rates to drop by 0.1% and long-term ones to hold steady at 0%.
It also undertook actions such as establishing interest scheme to promote lending.
BOJ, the biggest player in the government bond market, has almost half of all Japanese government bonds in its balance sheet.
BOJ scraps ETF purchase target
In a move to address criticism of heavy-handed intervention in the Japanese market, the Bank of Japan (BOJ) in March has scrapped its massive annual target for stock purchases, adding it would only purchase these assets when necessary.
Aiming for flexibility, the BOJ kept the upper limit target for net annual purchases of exchange-traded funds (ETF) at 108 bn USD and for Japan’s real estate investment trusts (J-REITs) at 1.62 bn USD in place. But, to maintain the pace of the asset purchase program set during Covid-19, the Bank of Japan said it has no plan to end its ETF buying or selling.
The Japanese central bank has further halted the purchases of Nikkei 225 ETFs for the first time since 2010 and limited its purchases of ETFs to those linked to the broader TOPIX index, as of 1 April.
The Bank of Japan’s unconventional policy methods by huge purchases of not only govt bonds but also ETFs has made it a dominant player of its domestic stocks and bonds. The Bank of Japan for years now tried to stimulate the economy with securities purchases.
Equity index fund purchases by the central bank have led to an overvaluation of the small companies in the Topix. BOJ owns 7% of the Topix with its 2,200 companies.
After years of building a stock portfolio worth hundreds of billions of dollars, BOJ is the largest holder of Japanese stocks with stock holdings worth more than $450 billion as of March 1, according to NLI Research Institute. Due to this, BOJ has been criticized over the years for influencing and manipulating the bond and stock markets.
Long way to reach 2% inflation target
Japan’s central bank expects a slightly weaker price development than previously forecasted as the pandemic made its inflation target of 2% even more difficult to achieve. For years now, Japan faces a higher risk of deflation than of inflation unlike Europe and the United States. As per BOJ officials, Japan’s ultra-loose monetary policy easing will be prolonged as prices are likely to keep falling for now.
Japan’s central bank has continued massive monetary stimulus launched eight years ago, in its prolonged battle to fire up the rate of inflation, which has been slipping further since the end of 2019. Ten years after the adoption of the 2% target, the Bank of Japan still seeks to achieve the price stability target as it provides the foundation for the nation’s economic activity.
Core consumer prices in Japan slowed for a second straight month in February, to 0.4% from a year earlier, remaining below the BOJ’s 2% target.
“With global central banks reaffirming their commitment to monetary easing, the BoJ is walking a fine line between improving the sustainability of its measures and avoiding perceptions that it is edging towards tightening”, Stefan Angrick, Senior Economist at Oxford Economics said in a current research briefing.
Economy’s road to recovery amid Covid-19
In line with central bank peers, the Bank of Japan is set to offer monetary support for the Japanese economy through Quantitative Monetary Easing (QQE) with yield curve control, imperative for the pandemic hit economy.
The country’s economy was already struggling with the pressure of chronic deflation that lasted over a decade. Further, the pandemic is likely to weigh on domestic demand for longer than expected with Japan being the last of the G7 to kick-start its vaccine programme. Japan’s economy is expected to shrink slightly in the first three months of 2021, owing to weak demand for Japanese goods and services amid global supply disruptions caused by the pandemic. Further, new coronavirus emergency measures introduced in January to prevent the spread of Covid-19 also weighed on consumption.
However, Japan has controlled the virus better than most western countries and the government also increased their spending to help fund the efforts in grappling with the virus. Three packages worth $3 trillion have been rolled out in the current fiscal year. There are rising hopes for Japan’s rebound as economies come out of lockdowns and vaccine continue to rollout.