BOJ's new framework faces test as market to scrutinise bond operations

[TOKYO] The Bank of Japan's new policy framework will face its first test in coming weeks as market players look to how the central bank will handle its bond buying operations to achieve its new policy target in long-term bond yields.

The BOJ said on Wednesday it would aim to guide the 10-year Japanese Government Bond (JGB) yield around zero per cent, ditching its previous main policy target - increasing its bond holdings by 80 trillion yen (S$1.08 trillion)a year.

Although the BOJ said it would maintain the pace of its bond buying for the time being, many investors believe the new framework is a lead-up to its efforts to taper its massive bond buying as the central bank was running out of bonds to buy.

"Considering that it has shifted to a target in yields, the BOJ may reduce its bond buying at a fairly fast pace," said Atsushi Mizuno, former BOJ board member and now Japan vice chairman of Credit Suisse.

Given that the BOJ's massive buying has helped to bring down JGB yields in the last three years, market players think the 10-year JGB yield is likely to decline well below the BOJ's target if the BOJ continues to buy at the current pace.

After the BOJ's announcement, the 10-year JGB yield briefly rose to a six-month high of 0.005 per cent but fell back to minus 0.055 per cent on Friday.

Still in the dark on how much fluctuation the BOJ is ready to tolerate around zero percent, market players for now will be scrutinising the central bank's bond buying operation in coming weeks to assess the BOJ's comfort zone.

The BOJ said on Wednesday it could set a floor on yields at which it buys JGBs.

The BOJ is expected to conducts its first bond buying operation under its new policy framework on Monday.

REUTERS