The Bank of Japan continues its 'stealth tapering' of bond purchases

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  • The Bank of Japan continues to say that it will purchase around 80 trillion yen of Japanese government bonds (JGBs) per annum in order to keep benchmark 10-year JGB yields anchored around 0% as part of its yield curve control program.
  • The only problem is it isn’t.
  • Current asset purchases are running at less than half the annual target, and yields continue to sit in an acceptable range. The US Fed, ECB and several other major central banks are already moving towards normalising monetary policy settings.

The Bank of Japan (BoJ) continues to say it will purchase around 80 trillion yen of Japanese government bonds (JGBs) per annum in order to keep benchmark 10-year JGB yields anchored around 0% as part of its yield curve control program.

However, there’s a slight problem.

It isn’t.

As seen in the excellent chart below from Westpac Bank, whether measured by growth in the size of assets held on the BoJ’s balance sheet or the size of Japan’s monetary base, it simply isn’t purchasing bonds at the pace it says it will.

Westpac Bank

The recent slowdown coincides with the decision from the BoJ to allow for more flexibility in its 10-year yield target, suggesting yields can move within 20 basis points in either direction of 0%.

Despite higher yields in the US and other parts of the world in recent months, the increased flexibility has allowed the BoJ to conduct what some are calling a “stealth tapering” of monthly asset purchases without making a formal announcement.

The BoJ will meet next week to discuss monetary policy settings. Given it hasn’t been required to purchase anywhere near the amount of bonds needed to keep yields in an acceptable range, the question markets will once again be pondering is whether the BoJ should simply abandon its annual purchase target?

The US Federal Reserve is already reducing the size of its balance sheet by allowing maturing securities to roll off without being reinvested. And the European Central Bank plans to stop monthly asset purchases by the end of December this year.

Both are gradually moving towards normalising policy settings a decade after the financial crisis. The BoJ could well be next.

The BoJ will begin its two-day monetary policy meeting on Tuesday, October 30. The decision will be announced after the conclusion of the meeting on Wednesday, and will include updated economic projections.

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