TOKYO: Japan must prepare for when the central bank drops its 0% cap on long-term interest rates and when private investors become the dominant player in the government bond market, said said a finance ministry official overseeing the debt issuance.
Although massive bond purchases by the Bank of Japan (BOJ) are reducing market liquidity, they have not disrupted government fundraising, said Michio Saito, who heads the ministry’s issuing division. Japanese government bonds (JGB).
“It’s a comfortable situation for us as we are able to issue JGBs at low interest rates on a stable basis, partly due to the effect of the BOJ’s monetary policy,” he said. Saito told Reuters in an interview on Thursday.
“But we have to keep in mind that the BOJ’s current policy won’t last forever. Going forward, it won’t buy as many bonds as it does now and won’t set interest rates anymore. at a defined level,” he said. .
The Ministry of Finance (MOF) must prepare for when the central bank changes ultra-low rates, such as taking steps to improve liquidity in the JGB market, said Saito, who has become the office’s managing director. finance department in June.
Saito, known as “Mr. JGB” for his expertise in the market, said his division will work to develop market infrastructure when private investors replace the BOJ as the major player in the JGB market. .
The remarks highlight how Japanese policymakers are quietly preparing the ground for when the BOJ withdraws its massive stimulus package, as its counterparts around the world tighten monetary policy to deal with soaring inflation.
“We are working closely with the BOJ to ensure that the functioning of the JGB market does not deteriorate too much,” Saito said.
As part of its Yield Curve Control (YCC) policy, the BOJ caps the 10-year yield around 0% and offers to buy unlimited JGBs to defend an implied cap of 0.25% around of the objective.
BOJ Governor Haruhiko Kuroda has repeatedly dismissed the possibility of a near-term exit from ultra-low rates, stressing the need to focus on supporting a fragile economic recovery.
But Vice Governor Masayoshi Amamiya, seen as a strong candidate to succeed Kuroda when his term ends next April, said the BOJ still needs to consider appropriate ways to get out of super-easy politics.
After years of massive buying to push inflation up to its 2% target, the BOJ now holds half of the JGBs in circulation on the market.
Growing upward pressure on yields forced the BOJ to buy a record monthly amount of JGB in June to defend its yield cap, undoing years of efforts to cut its huge buying and drawing criticism from investors for distorting market prices.