BOJ Bond Buying Tweak Sparks Fears Of Imminent Tapering

On Friday, the Bank of Japan tweaked its monthly government bond buying plan, sparking bond market fears that it may further reduce its massive bond buying, with the news pushing down the price of 10-year Japanese government bond futures as much as 10 ticks.

The BOJ announced it would reduce the frequency of its buying in one to three, three to five, and five to 10-year bonds to five times in September from six times in August.

At the same time, it increased the maximum amount of its buying in each operation in these maturities: it raised the upper buying limit for one- to three-year bonds and three- to five-year bonds to 400 billion and 450 billion yen from 300 and 350 billion yen, respectively according to Reuters.

While the change seems technical on the surface - and may be calendar-driven as there are fewer business days in September when the BOJ can conduct its buying operations - traders have grown highly sensitive to any changes in the BOJ's massive QE program amid growing uncertainty over how much longer it can sustain its current ultra-easy policy.

The BOJ said it would conduct its first buying in the five to ten year zone on Thursday.

As a reference, in August the BOJ bought 400 billion yen, the mid-point of its target buying amount, of 5 to 10-year maturities in each of its six scheduled operations, for a total of 2.4 trillion yen. Doing the math, assuming the BOJ sets its buying in September at 450 billion yen, also the midpoint of the new range, it would amount to monthly buying of 2.25 trillion yen, another indication the BOJ is engaged in not so stealth tapering.

By the same logic, the BOJ’s buying in 3-5 year bonds will be reduced to 1.75 trillion yen from 1.8 trillion yen if the BOJ sets its buying at the middle of the range at 350 billion yen.

Commenting on the shift, Mizuho's Toru Suehiro told Bloomberg that the decrease in the frequency of the Bank of Japan’s bond-buying operations in September suggests the central bank is willing to reduce purchases.

He also said that "the higher upper limit of bond-buying ranges suggests BOJ would be wiling to buy more if necessary, given it’s unclear how the market will respond to the reduced frequency" but added that "some market participants may be thinking the reduced frequency is due to holidays in September."

In other words, unless the BOJ increases purchases at the first operation next month, the lower frequency will be taken as a plan to cut overall purchases.

Which will hardly be a surprise: the BOJ has been gradually slowing the pace of its bond buying as its bond holdings reached more than 40 percent of the entire market, leading to shortage of bonds available for investors and fall in the market liquidity.

Last month the BOJ said it would allow the 10-year JGB yield to move in a wider range than before but the market’s volatility has quickly dwindled since then.