By Leika Kihara
Tokyo (Reuters) – Talking about major budgetary expenses and a subsequent peak in super long yields raise questions about the speed with which the Bank of Japan can reduce its purchases of bonds, adding to the challenges it is confronted by removing the remains of its massive monetary stimulus.
Although the BOJ is unlikely to increase the purchase of bonds, the increase in super long yields could affect its decision on the pace and the composition of the future quantitative tightening (QT), say analysts and familiar sources with the thought of the central bank.
“After having abandoned control of the yield curve last year, long -term interest rates are no longer monetary policy tools for BOJ,” said one of the sources. “The key would be whether the increase in super long rates affects yields for other maturity areas.”
The yields on the bonds of the super long Japanese government (JGB) have increased regularly since April, even if those of other deadlines remain stable, the 40 -year yield reaching a record of 3.445% on Thursday.
Although the increase is taken partly by the decline in the demand for life insurers, it also reflects expectations of the Japan finance aggravation market, legislators, calls for huge expenses and tax reductions before an election of the higher chamber scheduled for July.
“Investors avoid super long obligations on concerns about Japan’s tax problems. This eroded liquidity and causes invisible market distortions in the past,” said Katsutoshi Inadom, main strategist at Sumitomo Mitsui Trust Management.
Although the BOJ QT Plan has little to have a direct effect on its rate increase in rates, a peak in bond yields could affect businesses and make the public more difficult to convince the need to push borrowing costs in the short term.
The progress of the market comes at a delicate moment for the BOJ, which will examine at the political meeting next month an QT program existing in March, and will offer an obligation conic plan for April 2026.
As part of the current plan established last year, the BOJ slowed down bond purchases of approximately 400 billion yen (2.74 billion dollars) by sorting in half for monthly purchases to 3 yen billions by March 2026 – a pace that will decrease the 3.9 billion dollars of the bank up to 8%.
Next week, BOJ will conduct consultations with banks, insurers and other market players for their point of view on the desirable rate of narrowing. The results will serve as the basis for the Council’s decision on the QT plans for the rate review from June 16 to 17.
No quick solution
The QT plan is a crucial part of the Central Bank’s strategy to wean the economy outside the decades of ultra-lanier monetary policy.
