Japanese Government Bonds in Focus as BOJ Mulls Bond-Buying Reductions

Institutional investors are divided on how quickly the Bank of Japan should pare back its bond-buying program, following a meeting that included life insurance firms, casualty insurers, and asset managers. This variance in opinions came just a day after the nation’s megabanks called for sweeping cuts. Attendees reported a wide range of options discussed, from gradual reductions to a complete cessation of bond purchases. Despite these discussions, the central bank did not present a specific plan for reducing its bond purchases. The surprising lack of consensus among institutional buyers of Japanese government bonds highlights the difficulty the BOJ faces in formulating a plan that will satisfy market participants. This uncertainty increases the risk of some investors being caught out by the central bank’s final decision. The BOJ’s efforts to gather market feedback through these hearings underscore its challenge in balancing various market views. According to Tomo Kinoshita, global market strategist at Invesco, the BOJ needs to carefully consider each position, likely opting for a cautious approach initially. Market Overview:

• Institutional investors divided on BOJ bond-buying cuts.
• Wide range of options discussed, from gradual reductions to a complete cessation.
• Central bank did not present a specific plan for reducing bond purchases.

Key Points:

• Surprising lack of consensus among institutional buyers of Japanese government bonds.
• Risk of some investors being caught out by the central bank’s final decision.
• BOJ needs to carefully consider each position, likely opting for a cautious approach initially.

Looking Ahead:

• BOJ plans to unveil its strategy to reduce bond purchases over the next one to two years on July 31.
• Significant cuts suggested by megabanks, with proposals ranging from early sharp reduction to halving current monthly purchases.
• Lack of consensus indicates potential for sizable market reactions when the BOJ’s plan is revealed.

The central bank’s holdings of Japanese government bonds (JGBs) are larger than Japan’s entire economy, necessitating careful monitoring of the BOJ’s next move by bond market participants. The BOJ plans to unveil its strategy to reduce bond purchases over the next one to two years on July 31. Wednesday’s meeting followed a session on Tuesday where megabanks suggested significant cuts, with proposals ranging from an early sharp reduction to halving the current monthly purchases of ¥6 trillion to ¥3 trillion. Stock prices for banks and insurance companies rose on Wednesday, driven partly by the prospect of larger reductions in the BOJ’s bond-buying program. Katsutoshi Inadome, senior strategist at Sumitomo Mitsui Trust Asset Management, noted that market players are increasingly anticipating a substantial reduction. However, a survey released by the BOJ showed a wide variety of views among market participants, with suggested cuts ranging from zero to ¥4 trillion. This lack of consensus indicates the potential for sizable market reactions when the BOJ’s plan is finally revealed.