BOJ should steadily proceed with 'implicit' tapering: former policymaker

[TOKYO] The Bank of Japan should steadily proceed with an "implicit tapering" of its bond purchases as any rise in yields will be temporary with many private investors waiting to buy on dips, a former central bank policymaker said on Friday.

Sayuri Shirai, a former BOJ board member, said the central bank may temporarily accelerate purchases of Japanese government bonds (JGB) to contain rises in bond yield, but won't have to buy huge amounts to cap yields around its zero per cent target.

The BOJ has already been slowing its JGB purchases to around 50-60 trillion yen (S$608-730 billion), despite a loose pledge to buy at a pace that increases its holdings by 80 trillion yen per year, Ms Shirai said.

"What the BOJ is now doing is implicit tapering. That was probably the BOJ's key aim in revamping its policy framework last year. The BOJ knew it was getting more difficult to maintain the current pace of bond buying," Ms Shirai said.

"The BOJ may briefly increase its bond buying when yields are rising as is the case now. But I don't think it will be forced to keep buying at a pace well above 80 trillion yen to control yields as there's always strong appetite for JGBs in the market," she told Reuters.

Expectations of tighter monetary policies in Europe and the United States have pushed up global bond yields, including JGBs, forcing the BOJ to buy additional amounts of 10-year bonds on Friday to keep yields low.

Ms Shirai said the BOJ's yield curve control policy may run into trouble with inflation still well off its target, forcing the bank to maintain its stimulus programme longer than originally hoped for.

The BOJ now expects inflation to hit its 2 per cent target by March 2019, but Ms Shirai said the central bank is now likely to push back the timing at a quarterly review of its long-term projections this month or October.

"The BOJ should come up with a realistic estimate on when inflation would hit 2 per cent. Based on that, it should lay out a sustainable framework on the pace of tapering," said Ms Shirai, who served a five-year BOJ term until March 2016.

Ms Shirai said the BOJ will probably aim to slow its bond buying to around 50-trillion-yen per year this year. "It should continue to taper but very carefully and slowly, to prevent market disruption," she said.

REUTERS