The sudden slowdown in the Bank of Japan's bond buying program, in one chart

For several years the Bank of Japan (BoJ) has pledged to buy around 80 trillion worth of Japanese Government Bonds (JGBs) per annum as part of its quantitative and qualitative easing (QQE) with yield curve control (YCC) program, done in an attempt boost the Japanese economy and inflationary pressures after decades of underwhelming results.

However, there’s just one problem.

The BoJ hasn’t been buying anywhere near that level of JGBs over the past year, falling to less than half the level stipulated by the bank.

Source: Macquarie Bank

The decline in asset purchases has got some in financial markets excited about an earlier-than-expected hawkish shift in BoJ monetary policy settings, contributing to some of the recent strength seen in the Japanese yen.

However, while some interpret the reduction in asset purchases as a sign the BoJ is moving towards tighter policy settings, to Ric Deverell and Hayden Skilling, Economists at Macquarie Bank, those looking for a major shift from the BoJ this year are likely to end up disappointed.

“Some market commentators have also pointed to a scaling-back in the rate of bond purchases and balance sheet expansion by the Bank of Japan as an early signal of monetary policy tightening,” the pair wrote in a research note released late last week.

While many market commentators and market pricing have recently been moving towards expectations of earlier monetary policy tightening by the BoJ, we consider such a move in 2018 very unlikely.

“Given the scar tissue from previous false dawns in Japan, we expect the BoJ to remain very cautious, with the likelihood that the economy will take another hit in 2019 as the VAT increases clearly front of mind.”

Given that view, Deverell and Skilling are forecasting that the BoJ will leave policy unchanged this year, keeping overnight interest rates at -0.1% and 10-year JGB yields around 0% as part of its yield curve control program.

As for the level of asset purchases required to anchor 10-year yields at 0%, they say much will be determined by global factors, rather than an outright decision from the BoJ to “officially” trim bond purchases.

“If global yields remain at current levels, central bank credibility could permit a further reduction in asset purchase,” they say.

“Alternatively, if global yields continue their recent upward trend, the Bank of Japan may need to once again increase the rate of purchases to convince the market that its 0% 10-year JGB yield target remains credible.”

Regardless of the size of actual asset purchases, policy will remain the same, in other words.

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