Bloomberg
Tokyo


The global economic slowdown that prompted the Federal Reserve to delay an interest rate increase is also adding pressure on the Bank of Japan to boost stimulus, and it may need to consider new measures as sovereign note purchases near their limit, analysts say.
The BoJ may start buying debt issued by local governments and notes to fund government projects, according to UBS Group and JPMorgan Chase & Co. Outstanding issuance of those bonds total ¥58tn ($482bn) and ¥69tn respectively, according to UBS calculations. Financial firms including banks can only sell so many sovereign notes to the central bank because they need to keep some debt to meet collateral requirements, among other reasons.
Even as the BoJ buys as much as ¥12tn of Japanese government bonds each month, or more than 90% of notes issued to markets, it’s nowhere near reaching its 2% inflation target, with consumer prices falling in August.
Analysts said the central bank’s options may include cutting the interest rate on deposits that banks keep at the BoJ, while UBS said policymakers may decide to begin purchasing local government bonds after October, when it may start having trouble buying sovereign debt.
“If the BoJ faces difficulty procuring JGBs to boost the monetary base, it could turn to regional bonds or fiscal investment and loan programme bonds,” said Yusuke Ikawa, a UBS strategist in Tokyo. “There is a possibility of a change to the BoJ’s JGB buying environment from October.” The BoJ held a record ¥295tn of outstanding government bonds and bills at the end of June, making up 28.5% of all outstanding debt from 21.2% a year earlier. At this pace that ratio could exceed 50% by 2018. Banks have been cutting their holdings.
With the finance ministry planning to offer ¥36.9tn in new government bonds in the year started April, the central bank needs to secure about ¥45tn in JGBs from the market to meet its goal of expanding the monetary base by ¥80tn annually.
“The BoJ is likely to hit limits on its bond buying by the end of 2017 or early 2018,” said Mansoor Mohi-uddin, a senior markets strategist at Royal Bank of Scotland Group in Singapore. “The future lack of JGBs for the BoJ to buy will be critical for monetary policy making. This will make the BoJ more reluctant to raise its current pace of asset purchases any further now.”
Japan’s Government Pension Investment Fund, the world’s biggest retirement money manager, has nearly completed its shift to riskier assets such as shares from bonds to bolster returns, while Japan Post Bank Co, the largest holder of JGBs after the BoJ, is also reducing its domestic debt holdings.
The combined ¥127tn in outstanding local government bonds and so-called FILP notes according to UBS estimates compares with the ¥807.1tn in total JGBs the finance ministry predicts by March.
“Purchases of regional government or FILP bonds could become a possibility from next year if 10-year JGB yields plunge to 0.1% and expose a limit to buying JGBs,” said Takafumi Yamawaki, the chief rates strategist in Tokyo at JPMorgan. “The amount of these bond purchases won’t be significant and the effect on boosting inflation will likely be limited.” The 10-year sovereign yield was at 0.325% on Friday, after falling to a record low 0.195% in January. The benchmark bond previously traded on September 18.
“The Fed holding off a rate hike citing the need to observe the overseas situation will affect the BoJ’s policy decision,” said Naomi Muguruma, a senior market economist at Mitsubishi UFJ Morgan Stanley Securities Co in Tokyo. “We have been forecasting additional easing at the end of October and that probability has risen since the China shock from mid-August.” Muguruma expects a cut to the 0.1% interest rate the BoJ pays to lenders to keep excess reserves at the central bank, and lengthening the average duration of JGB buying operations. Ryutaro Kono, the chief Japan economist at BNP Paribas SA, doesn’t expect additional monetary stimulus now unless the yen surges beyond 110 to the dollar. The Japanese currency was at 120.30 per greenback at 9:46 am in Tokyo. A stronger yen and further economic slowdown in China would heighten the probability of a reduction in the BoJ’s interest rate on excess reserves, Kono said.
BoJ Policy board member Yutaka Harada said in June that a cut in the excess reserve rate was a possibility if more stimulus was needed. BoJ governor Haruhiko Kuroda said on Friday that consumer prices are rising about 1.1% when energy costs are excluded.
“Speculation for further stimulus will strengthen when the yen rises,” Kono said. “In that case, there is a possibility of cutting the interest rate on excess reserves rather than expanding bond buying.”