Japan Begins QE Tapering: BOJ Hints It May Purchase 18% Less Bonds Than Planned

Tyler Durden's picture

With the Fed expected to further tighten financial conditions following its now guaranteed March 15 rate hike, and the ECB recently announcing the tapering of its QE program from €80 to €60 billion monthly having run into a substantial scarcity of eligible collateral, the third big central bank - the BOJ - appears to have also quietly commenced its own monteary tightening because, as Bloomberg calculates looking at the BOJ's latest bond-purchase plan, the central bank is on track to miss an annual target, by a substantial margin, prompting investor concerns that the BOJ has commenced its own "stealth tapering."

While in recent weeks cross-asset traders had been focusing on the details and breakdown of the BOJ's "rinban" operation, or outright buying of Japan’s debt equivalent to the NY Fed's POMO, for hints about tighter monetary conditions and how the BOJ plans to maintain "yield curve control", a far less subtle tightening hint from the BOJ emerged in the central bank's plan released Feb. 28, which suggests a net 66 trillion yen ($572 billion) of purchases if the March pace were to be sustained over the following 11 months. As Bloomberg notes, that’s 18 percent less than the official target of expanding holdings by 80 trillion yen a year.

Some more details: the central bank forecast purchases of 8.9 trillion yen in bonds in March, based on the midpoint of ranges supplied in the operation plan. Maintaining that pace for 12 months will see it accumulate about 107 trillion yen of debt. At the same time, 41 trillion yen of existing holdings will mature, leaving it with a net increase of 66 trillion yen, well below the stated goal of 80 trillion yen.

And in another potential major shift to the status quo, one which would imply a sharp steepening in the JGB yield curve, the March plan indicates the BOJ may acquire 1.5 trillion yen of bonds due in more than 10 years, down 32 percent from the level in January 2016 when it introduced its negative rate policy. Other parts of the curve are also changed: for one-to-five-year notes, the projection is for an 8.6 percent decline, whereas the central bank will be buying roughly the same amount of five-to-10-year notes.

The BOJ appears to be joining other banks that are seeking to jumpstart the "carry trade" for local banks and pension institutions, by steepening the yield curve. The step-back from buying super-long bonds, those with more than 10 years to maturity, comes after Governor Kuroda and his colleagues said in September that an “excessive” decline in the yields has placed a heavier burden on companies seeking to meet pension obligations.

To be sure, the BOJ could and probably will vary its buying as it attempts to anchor borrowing costs for 10-year bonds at around zero percent, however holding onto both the targets for quantitative easing and yield-curve control has left investors scouring the central bank’s daily purchases to see whether the balancing act is achievable Bloomberg adds.

“If the BOJ was simply to reduce its annual target, it would probably have to do so over and over again, which would clearly look like tapering,” said Naomi Muguruma, a senior market economist at Mitsubishi UFJ Morgan Stanley Securities Co. in Tokyo. If the appearance of tapering isn’t what the Japanese central bank wants, it could replace its 80 trillion yen annual target with one for monthly purchases at its July 19-20 meeting, she said. So far it has not suggested it would do that.

As Bloomberg further adds, "while the BOJ board is projected to keep policy unchanged at its March 15-16 meeting, some central bankers are now considering giving cues on what they’d do with rate policy once inflation starts picking up -- a shift that could end the focus on JGB purchase plans."

With oil prices higher than a year ago and a relatively weak yen, the central bank officials expect the benchmark inflation gauge to be around 1 percent later this year, according to people familiar with the discussions.


The expected pick-up in inflation and rising U.S. Treasury yields have put pressure on the BOJ’s yield-curve control policy. The Japanese central bank offered to buy an unlimited amount of five-to-10-year bonds at a fixed rate on Feb. 3 after borrowing costs surged to the highest in 12 months.

Of course, the BOJ may be simply launching its latest - in the past two decades - attempt at renormalizing the yield curve (all the previous ones have failed). “Given the BOJ is committed to managing the yield curve, any upward pressure on yields could lead to an increase in bond purchases in the future,” said Yusuke Ikawa, Japan strategist at BNP Paribas SA in Tokyo. “If it maintains its zero percent target, the BOJ faces the risk of one day having to buy more than 80 trillion yen of bonds a year.”

Perhaps not surprisingly, local banks are refusing to wait and see what the outcome will be: according to FT parent company, Nikkei Asian Review, Japanese banks are shedding government bonds at an accelerating pace, slashing their total holdings at the end of January to a 14-year low. The value of Japanese government bonds held by domestic banks was 79.59 trillion yen ($693 billion) as of Jan. 31, the Bank of Japan said, falling below 80 trillion yen for the first time since 2003.

Over the past year, Japanese banks were purchasing large amounts of higher-yielding U.S. government bonds, but expectations that President Donald Trump will engage in aggressive fiscal stimulus have produced a spike in U.S. interest rates and sent bond prices plummeting. In response, domestic banks "sold Japanese government bonds to cover the losses," said Kazuhiko Sano of Tokai Tokyo Securities.

Regional banks, relatively weaker in portfolio management, have been prominent in this trend. They amassed net JGB sales of 246.7 billion yen in November and 277.6 billion yen in December, according to the Japan Securities Dealers Association.

As the Nikkei reported last week, this is a concern for the Financial Services Agency, which plans to examine foreign bond investments by regional banks. "It will become tougher for regional banks to invest in overseas bonds," said Katsutoshi Inadome of Mitsubishi UFJ Morgan Stanley Securities.

And so, with both the ECB and BOJ gradually phasing out their support of ultra low interest rates, the unpleasant scenario envisioned last week by SocGen's Albert Edwards may soon come to pass as investors, worried about the removal in central bank backstops, proceed to liquidate holdings en masse, leading to a sharp spike in global yields higher, catalyzing the next leg lower in global risk assets as Goldman warned over the weekend.

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SuperRay's picture



GUS100CORRINA's picture

Let the tightening begin.

A good market correction would actually be a healthy thing to work off the excess!

knukles's picture

This is gonna be so Awesome!
Central banks tightening (even if only at the margions, or whatever) just as the global economy is having some "troubles".


philipat's picture

a/k/a "Policy Error", otherwise a deliberate strategy to crash the "markets" because they can't "extend and pretend" any longer. Either way, the finger points at the Central Banks. Couldn't happen to nicer bunch of Guys....

peddling-fiction's picture

I can feel the Phoenix approaching.

Gentlemen, get your gold ready to get a spot on the SDR-backed Phoenix.

remain calm's picture

They have to buy less because they already own all of it

flicker life's picture
flicker life (not verified) remain calm Mar 13, 2017 5:36 AM

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Celotex's picture

Yes, but yes but when central banks say "tightening," what they mean is easing just a little less.

LetThemEatRand's picture


Actually, "less bonds" is correct in this context.  Japan is buying less debt, with the bonds being a singular group entity.

Celotex's picture

LetThemEat, you beat me to the grammatical scold you suggest in your post. But I would say that "less bonds" is incorrect because a bond is a "count noun."  "Less debt" is okay because debt is a ""non count" noun.

NoDebt's picture

Is it countable?  Then 'fewer' is the correct term.  The number of bonds they will/won't buy is coutable.

Almost 10:00 at night, 2 doubles in me and I'm doing grammar lessons.  I'm gonna go watch some porn, get a couple hours of sleep and start fresh tomorrow.  


So It Goes's picture

No negative interest rates for You!  (To paraphrase the soup nazi Seinfeld episode)

philipat's picture

I'm surprised because their QE strategy has been so effective hasn't it?......./s

Perhaps they are just running out of things to buy through more money printing?

ATM's picture

Whaaaaa, Hahahaaaaa....

Thanks for that! I needed a really good laugh. Taper purchases of Japanese bonds!!! Now I've heard everything!

Fascal rascal's picture
Fascal rascal (not verified) Mar 12, 2017 7:01 PM

Current political environment is moving away from what sheeple call "safe spaces".. bonds?

Dump's picture

So pension funds are finally squealing in pain from ZIRP.

But the BOJ is about the only bidder in the Japanese bond, corporate bond and equity markets, as Japan is bust and cannot repay debt in terms of purchasing power, so no-one else with any sense is buying.

Standby for a great sucking sound as Japan implodes down the toilet.


PersonalResponsibility's picture

Japan is the USA's future as an experiment. So far so good. If they can do it with their trillions, we'll be able to do it with our's. Any questions? Anyone still want to short?

MrNoItAll's picture

Central banks are all caught between a rock and a hard spot.  Every move they make will send out negative shock waves, and every move they don't make will send out negative shock waves.  They're fucked if they do and fucked if they don't.  Which is probably why the main consideration these days for central banks is which choice buys the most time, probably measured in days, or weeks at most.


We Are The Priests's picture

Yes.  Tightening into weakness.  Do more of that.

hotrod's picture

Let the world CBs tighten at the same time.  EU, BOJ, USA and China have all announced tightening.  LOLOLOLOLO

JailBanksters's picture

Japan has been running a Ponzi Scheme scheme now for more than 20 years

And NOW they want to Taper a Ponzi Sceme !! Pfft



Farmer Joe in Brooklyn's picture

Unless this is the final act...?

Maybe they are finally pulling the pin...

JailBanksters's picture

That's the thing, there's never a final act

If you straigten out a roller coaster, that's the Central Bank.

Printing, Not Printing, Printing, Printing, Not Printing.

The Fix is to Join the last dip back to the beginning of the Coaster.


If Japan gets out of this Loop, they will have to be the best Economists, Accountant ,Treasurer and Statistician ON THE PLANET.

It's more like it's going to take an Mega-Earthquake to destroy this Coaster.



Last of the Middle Class's picture

You'll probably see an 18% decrease in all economic activity as all their economy is right now is QE based. Hang on to your chopsticks and rice paddies as the inflation monster will come roaring into their lives after the QE ball is over.

Cutter's picture

The BOJ is delusional and desperate:

"The BOJ may acquire 1.5 trillion yen of bonds due in more than 10 years, down 32 percent from the level in January 2016 when it introduced its negative rate policy."

"That’s 18 percent less than the official target of expanding holdings by 80 trillion yen a year."

"Japanese banks are shedding government bonds at an accelerating pace, slashing their total holdings at the end of January to a 14-year low."

"It will become tougher for regional banks to invest in overseas bonds." 

They believe they can taper, amidst rising inflation, while the banks are selling JGBs, and yet yields will stay low.  For some inexplicable reason, markets continue to believe this fantasy.  The BOJ is quickly becoming the only buyer of JGBs. They buy or rates skyrocket and bankrupt the country.  Simple as that. 

Their desperation is evident as they turn to their last hope, using their power of regulation to prevent Japanese banks from buying overseas assets.   The result will merely be more capital flight, further compounding this vicious circle.

Why isn't the yen at 150 to the dollar, and JGB yields ten times what they are?