Bank of Japan plans to continue policy normalization; Currently owns 50% of the outstanding bonds

The Bank of Japan plans to take a cautious approach to policy normalization, regardless of the large-scale monetary easing that ended in March, observers said.

This comes after Friday’s vote by BOJ policymakers to reduce government bond purchases, and specific details will be decided at the next monetary policy meeting on July 30-31. BOJ Governor Kazuo Ueda described this as an “exceptional measure” formulated with input from market participants.

Guaranteeing flexibility

At a press conference after the policy meeting that ended Friday, Ueda stated: “It is appropriate to reduce government bond purchases in a predictable manner while ensuring the flexibility to take into account the stability of the bond market,” stressing the need emphasized to present a clear plan to market participants.

The BOJ decided in March to end its negative interest rate policy and abolish yield curve control (YCC). However, to avoid a sharp rise in long-term interest rates, the country continued to buy about ¥6 trillion worth of government bonds every month as a transitional measure. It assessed how the market has digested policy changes since March, and Ueda explained that this assessment is now “largely complete.” Nevertheless, the reduction in bond purchases could destabilize the market, necessitating careful consideration of the views of market participants.

Growing balance sheet

The BOJ’s holdings of government bonds have grown rapidly since the launch of quantitative and qualitative easing by former Haruhiko Kuroda administration in April 2013. With short-term interest rates near zero and little room for further cuts, the aim was to raise money to supply to the market. by buying large amounts of government bonds to drive up prices.

The BOJ introduced YCC in September 2016, shifting its monetary policy tools from providing market liquidity to manipulating long- and short-term interest rates, but its bond holdings continued to grow.

At the end of 2023, BOJ government bond holdings stood at ¥581 trillion. If the amount purchased becomes less than the amount redeemed, ownership would decrease, but Ueda noted: “The Bank of Japan owns 50% of the total outstanding government bonds. It will not reach a desirable level within one to two years.” He indicated that reducing holdings will be a long-term effort.

Takayuki Tanaka, a professor at Senshu University specializing in monetary policy, said: “To reduce the balance, the purchase amount must be reduced to about ¥3 trillion – ¥4 trillion per month.”