The Bank of Japan bought long-term government bonds off the market for the first time in six years. A large amount of government bond purchases to keep long-term interest rates at a certain level has led to a decline in market functioning and there is growing opinion among market participants that the Bank of Japan will be forced to review its policy.
According to Bloomberg, the amount of purchases of long-term government bonds by the Bank of Japan between January and November 2022 reached the level of 94 trillion yen, the highest since 2016. At the time, the Bank of Japan it was buying large quantities of long-term government bonds as part of its quantitative and qualitative monetary easing, but decided in January 2016 to adopt a negative interest rate policy. Subsequently, in September of that year, the Bank introduced yield curve control (YCC) in response to interest rates falling too far overall.
Harumi Muguruma, chief fixed income strategist at Mitsubishi UFJ Morgan Stanley Securities, points out, “Currently, large-scale government bond purchases are again needed to maintain YCC.” As a result, market liquidity is declining, and to continue monetary easing, “there are many market participants who believe policy reviews are needed to improve sustainability and the number will continue to rise,” he said.
Amount of long-term bond purchases from January to November
Sources: Bank of Japan, Bloomberg
Mr. Muguruma said, “The goal of the YCC was to shift the policy tool from the amount of money to the interest rate and increase the sustainability of monetary easing.” It has been almost 10 years since the start of a different dimension of monetary easing, which aims to achieve the 2% inflation target in two years. While policy implementation is still uncertain, market functioning has deteriorated significantly and market participants are once again turning their attention to policy sustainability.
In the bond market survey (November survey) released by the Bank of Japan on 1st, the working DI, calculated by subtracting the ratio of those who answered “low” from the ratio of those who answered “high”, was -51 since the survey started in 2015. recorded the lowest of Nobuyasu Atago, chief economist of Ichiyoshi Securities Co., Ltd., said: “The decline in market functioning has reached a point where it is inevitable.”
Market functioning has dropped to its worst level ever
Bond market survey (November survey)
Sources: Bank of Japan, Bloomberg
Mr. Atago, who is a graduate of the Bank of Japan, is paying attention to the fact that the DI bid-ask spread judgment (from three months ago) has deteriorated to minus 50. The greater the price difference between the buying and selling, the more difficult it is to trade at the expected price, which indicates that liquidity is deteriorating.
DI has deteriorated significantly in the last three times: the February 2016 survey, the August 2018 survey and the May 2020 survey. The Bank of Japan implemented YCC in September 2016, expanded the range of fluctuations in long-term interest rate in July 2018 and conducted a policy review in March 2021.
Running out of liquidity
Atago said, “The BOJ should focus on this indicator because the risk of a sudden rise in interest rates due to some type of shock increases as liquidity dries up.” “Sustainability” was the keyword for the last three policy responses and “the immediate environment is very similar to that time and the scope for policy responses will increase over time”.
Governor Haruhiko KurodaCongress“Isn’t it too early to discuss concretely” the monetary policy framework? Kazuhiko Sano, chief bond strategist at Tokai Tokyo Securities, said that even after retiring as governor in April 2011, he said, “It will be difficult to conduct immediate inspections and audits, and the priority will be on policy continuity. And if the former Vice President Nakaso becomes the new president, it will be even worse”.
Reiko Sera, a market strategist at Sumitomo Mitsui Trust Bank, said the BOJ “would like people to quickly realize that they are destroying the market.” In 2023, as the US economy is expected to deteriorate, upward pressure on interest rates will ease and the BOJ’s purchases of government bonds are expected to decrease.
