Tokyo, Japan – The Bank of japan (BOJ) signaled a potential shift in its monetary policy during a recent policy meeting, discussing the possibility of reducing government bond purchases while simultaneously exploring ways to provide medium- to long-term funding to the market.The meeting, held on October 26-27, 2023, included a temporary suspension lasting over 12 hours, resuming at 11:07 PM local time after initially pausing at 11:58 AM.
Discussions centered on the future size and composition of the BOJ’s balance sheet, acknowledging its impact on Japan’s financial system through both assets and liabilities. while acknowledging that excess reserves are likely to decrease, policymakers agreed that a ample asset base, including long-term government bonds, will remain necessary, particularly in conjunction with the BOJ’s banknote issuance.
One committee member advocated for not only purchasing government bonds but also actively supplying medium- to long-term funds directly into the market. Several members concurred that the BOJ’s balance sheet plays a critical role in influencing the Japanese financial economy and requires careful consideration from multiple angles.
Representing the Ministry of Finance, an attendee emphasized the importance of a “flexible response” and “sufficient consideration to stabilize the bond market” should the BOJ proceed with reducing its government bond purchases. This suggests concerns about potential market disruption from any policy adjustments.
The BOJ’s current policy of Yield Curve Control (YCC), implemented in September 2016, aims to keep 10-year Japanese government bond yields around 0%. Recent adjustments to the YCC in July 2023 allowed for greater flexibility, signaling a potential move away from strict control. The BOJ’s next policy decision is scheduled for December 18-19, 2023, and will be closely watched by global markets for further indications of policy normalization. Chairman Ueda Kazuo, appointed in April 2023, is leading the BOJ through this period of potential change.
Japan’s government debt currently stands at over 260% of its GDP, one of the highest ratios in the world. the BOJ is the largest holder of Japanese government bonds, owning approximately 50% of the total outstanding debt as of September 2023. Any significant reduction in bond purchases could therefore have a substantial impact on government borrowing costs and the broader economy.