TOKYO- The Bank of Japan’s massive asset-buying scheme introduced in 2013 led to a sharp deterioration in bond market function, which continued to worsen after the adoption of yield curve control, a central bank survey of market participants showed on Friday.
The findings highlight the strains that the central bank’s prolonged super-loose monetary policy has inflicted on market liquidity in the world’s third-largest economy, and comes amid heightening market expectations that the BOJ is starting to consider an exit from ultra-low interest rates.
The special survey, which came on top of a regular quarterly poll on bond market function, was conducted as part of a comprehensive review the BOJ is conducting on the impact its 25-year unconventional monetary easing steps on the economy and financial markets.
A diffusion index measuring how market participants viewed bond market functioning worsened sharply to 5 after the BOJ’s adoption of quantitative and qualitative easing (QQE) in April 2013, from 62 before its introduction, the survey showed.
The index worsened further to -48 after the introduction of negative interest rates in January 2016, and to -71 after the adoption of yield curve control (YCC), the survey showed.
“I see the biggest problem as the BOJ’s ownership of Japanese government bonds (JGB). It owns about 50 percent of the JGBs, which is too high. The market won’t recover unless this ratio falls close to 10 percent ,” said Katsutoshi Inadome, senior strategist at Sumitomo Mitsui Trust Asset Management.
Former Governor Haruhiko Kuroda deployed QQE in April 2013, aiming to shock the public out of a deflationary mindset with heavy money printing, and fire up inflation to the bank’s 2 percent target.
After the huge bond buying began drying up market liquidity, the BOJ pushed short-term interest rates to negative territory in January 2016. It then adopted YCC in September 2016, under which it caps the 10-year bond yield around zero. With inflation exceeding 2 percent for more than a year, many market players expect incumbent Governor Kazuo Ueda to dismantle his predecessor’s massive stimulus program next year. – Reuters