Bank of Japan's bond holdings effective in lowering yields, paper shows

The Bank of Japan's huge bond holdings had a strong effect in pushing down long-term interest rates and will keep influencing the yield curve regardless of the amount it buys in the future, the central bank said in a paper released on Monday.
 

The findings come ahead of the BOJ's scheduled announcement next month of a detailed plan on how to trim its massive bond purchases and reduce its nearly $5 trillion balance sheet.
 

The paper, released as part of the BOJ's comprehensive review of the pros and cons of past monetary easing steps, analysed how its massive bond purchases affected long-term interest rates through various channels.
 

 

The so-called "stock" effect, or the impact the BOJ's huge bond holdings had in pushing down yields, was stronger than the "flow" effect, or the impact its daily purchases had by swaying the market's supply and demand, the paper said.
 

"The BOJ's government bond holdings will remain high for the time being, regardless of the amount it will buy in the future," the paper said.
 

Since deploying a massive asset-buying programme in 2013, the BOJ has continued to buy large amounts of government bonds to lower borrowing costs as part of efforts to reinvigorate growth and fire up inflation to its 2 per cent target.
 

With inflation having exceeded 2 per cent for two years, the BOJ ended eight years of negative interest rates, bond yield control and other remnants of its massive stimulus in a landmark shift away from ultra-loose monetary policy.
 

The paper's findings underscore the BOJ's focus on reassuring markets that any tapering of its bond buying likely won't lead to a sharp rise in long-term yields.
 

The BOJ's comprehensive review was launched last year as part of Governor Kazuo Ueda's initiative aimed at scrutinising the effects and side-effects of the various unconventional monetary easing steps the bank took in the past 25 years.