Bank of Japan cuts state bond redemption, market discusses possible policy tightening

Posted 09 January, 2018

On Tuesday, January 9, the market is actively discussing the possible cancellation of monetary incentives by the Bank of Japan after it lowered the volumes of state bond redemption.

It looks like, traders have focused on the bank's statement about decreased purchases of long-term bonds. As a result, US dollar-to-yen exchange rate lost some 0.5% and state bond yield between 20 and 40 years maturity peaked.

Although this slightly goes in line with the bank's policy for reduction of bond redemption, traders believe this step only stresses sensibility of markets to the cancelation of incentives.

The head of Japan's Bank many times denied possible cancelation of incentives in the near term, though some members of the board expressed concerns about insufficient monetary softening, in particular, its impact on profit margins of the financial institution.

With such course of eveтts, insiders say that the Central bank of Japan will probably have to consider higher target profitability and slower buying of risk assets in 2018  to be in line with other developed countries that are tightening monetary policy already now.

In 2017 US Federal Reserve raised interest rate three times, while the Bank of Canada tightened monetary policy for the first time over 7 years.  

The Bank of Japan generally keeps its promise made in 2016. Yet, the decision to reduce buying of bonds with 10-25 year maturity turned to be a surprise in the market. This has been the first such step over more than a year.

The bank generally lowered redemption of bonds with 10-25 and 25-40 year maturity by JPY 10 billion ($88.39 million) to JPY 190 billion and JPY 80 billion respectively.

US dollar to JPY touched the session bottom at 112.50 (some 0.5% down over a day).   

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