Notice of Reducing JGB Purchase

The Bank of Japan decided at its Monetary Policy Meeting on June 14th to reduce its purchase of Japanese government bonds (JGB) “to ensure that long-term interest rates would be formed more freely in financial markets.” The actual measures will actually be taken after next meeting in late July, after collecting views from market participants. While the policy change was aimed at deterring excessive depreciation of Japanese yen, the market responded to the decision with selling further depreciation.

The BOJ started quantitative easing in 2001 and began purchasing JGB to supply large amount of money after it embarked on ultra-easy monetary policy in 2013. Although the BOJ’s share of issued JGB was 13 percent (¥94 trillion) in 2013, it has swollen as much as about 50 percent (¥585 trillion) at the end of 2023. The bank now purchases ¥6 trillion of JGB every month, even though it finished the ultra-easy monetary policy in March.

 

The decision of reducing JGB purchase was to deal with current tendency of cheap yen. Yen depreciated against US dollar temporarily as low as ¥160 in late April, after BOJ Governor, Kazuo Ueda, reiterated that the trend of monetary easing would be maintained. “The recent trend of yen’s depreciation causes rise of consumers’ price and we are closely watching it in terms of operation of our policy,” said Ueda in his press conference after MPM yesterday.

 

But the announcement of reducing JGB purchase was not more than a notice. The bank is going to wait for next meeting before starting the reduction, buying time to discuss detailed plan for next one to two years. “Considering stability of the market, we will reduce the purchase in a foreseeable manner,” said Ueda, indicating a certain amount of reduction in next month.

 

Acknowledging slow progress in BOJ’s quantitative tightening (QT), the market responded with further selling of Japanese yen. Tokyo foreign exchange temporarily marked ¥158 per a dollar just after the MPM. While the market had expected immediate reduction of JGB, the bank showed a dovish stance by delaying the action. The move of the day reflected frustration of the market.

 

Depreciation of yen was also caused by the policy on short-term interest rate. The BOJ maintained the uncollateralized overnight call rate at around 0 to 0.1 percent. Another talking point for the market is when the BOJ will raise the rate again. After finishing the negative rate interest policy in March, the bank remained it for two consecutive meetings. There is an expectation in the market that the bank will raise it at next meeting.

 

However, simultaneous execution of measures, which would be a mixture of reducing JGB purchase with raising short-term interest rate, may impose a major impact on Japanese economy. Real wage is still negative for these two years. Japan’s GDP in first quarter this year marked 2.0 percent down, caused by stopping shipment of carmakers. BOJ will face difficult decision in next month.

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