The Bank of Japan (BoJ) has been on a bond-buying spree for several years now.
Like other major central banks such as the US Federal Reserve, the European Central Bank, and the Bank of England, it has used quantitative easing, or QE, in an attempt to help reflate asset prices, economic growth, and inflationary pressures through widespread asset purchases.
It’s had mixed success on those fronts so far: assets have ripped higher, economic growth is doing OK, but inflationary pressures — the BoJ’s bogey indicator for many a decade — are noticeably absent.
In order to achieve all of these policy goals, the BoJ has pledged to buy Japanese government bonds, or JGBs, at a pace of about 80 trillion yen per annum, aimed to keep the yield on benchmark 10-year JGBs anchored at around 0%.
While the BoJ had has little issue in keeping bond yields at a desired level, it has not been buying anywhere that amount of bonds recently.
As seen in the chart below from Westpac, rather than buying at an annual pace of around 80 trillion yen, its actual purchases have been only around half that level in recent months on a three-month annualised basis.
So what gives? Is the BoJ giving up on QE, or is it conducting some kind of stealth tapering of asset purchases?
As Sean Callow, senior currency strategist at Westpac notes, the decline in asset purchases recently reflects that the BoJ haven’t needed to defend the 0% level for 10-year JGB yields.
“The first half 2017 rally in US treasuries has probably been key to the slowdown in JGB purchases shown in this chart,” says Callow.
“A more benign global bond environment than the December quarter of 2016 means the BoJ has to buy fewer JGBs to maintain 0% on the 10 year.”
So the only reason asset purchases have fallen is because the BoJ hasn’t had to buy as many, benefiting from continued low inflationary pressures globally and a rethink on the probability of Donald Trump being able to deliver tax reform and increased infrastructure investment.
For what it’s worth, the BoJ has said that it will continue to buy JGBs until inflation “exceeds 2% and stays above the target in a stable manner”.
Excluding energy and fresh food prices, core inflation in Japan stood at 0% in the year to August.
On those grounds it suggests that it will be a long time yet before the BoJ decides to slow its annual rate of asset purchases, let alone start to reduce the size of its balance sheet as is about to happen with the US Federal Reserve.