San Francisco Frontiers - Bond-buying in focus as Bank of Japan decides policy

The central bank raised rates in March for the first time since 2007 as it seeks to normalise policy without destabilising the world's fourth largest economy.

Most analysts do not predict another hike when officials conclude a two-day policy meeting on Friday.

But the Nikkei business daily said Thursday they were "discussing adjustments" to the long-standing approach of spending big on bonds and other assets to pump liquidity into the system and keep borrowing costs down.

Each month the BoJ targets monthly government bond purchases of around $38 billion but now decision-makers are debating whether to reduce that, media outlets including Kyodo News said.

Such a move could mark another step away from nearly two decades of quantitative easing, designed to banish stagnation and harmful deflation from Japan's economy.

The scale of the BoJ's total assets is enormous -- larger than the country's gross domestic product -- and the bank holds more than half the value of all Japanese Government Bonds (JGB) in circulation.

Cutting back on bonds has been on the cards for months.

Policymaker opinion cited in the minutes of the BoJ's April meeting said the bank "should indicate its intention to reduce its purchase amount of JGBs" because it "needs to reduce the size of its balance sheet".

Shunsuke Kobayashi, chief economist of Mizuho Securities, told AFP that reducing bond holdings would help the BoJ trim its debt ahead of potential future rate hikes.

At the same time, the bank is facing "pressure from the prime minister's office to address the cheap yen", he said.

Other central banks worldwide aggressively hiked interest rates to tackle soaring inflation in recent years.

But the BoJ has largely stuck to its easy-money policies -- culminating in the Japanese currency hitting a 34-year low in April that led authorities to step into forex markets.

"I believe that it is justified (for the BoJ) to respond with monetary policy to prevent the weak yen from raising import prices and suppressing consumption," Hiroshi Namioka at T&D Asset Management said.

And because reducing government bond purchases is already widely expected, if the BoJ does not decide to do this, the yen will decrease further, he warned.

The BoJ wants to see demand-driven inflation of two percent, which has been met every month since April 2022.

As well as calling time on its outlier negative-rate policy in March, the bank has stepped away from other unorthodox policies including its yield curve control programme, which allowed bonds to move in a tight band.

C.Williams--SFF