The Bank of Japan will scale back on its monthly sovereign bond purchases, helping banks align their lending and investment strategies with the central bank's moves to normalize monetary policy.
The BOJ will announce details of the reduction of its monthly Japanese government bond (JGB) purchases by the end of July. The decision is being made to "ensure that long-term interest rates would be formed more freely in the financial market," the central bank said June 14 after its two-day policy review meeting.
"We will hear opinions from market participants and will pursue it properly," BOJ governor Kazuo Ueda said at a press conference after the meeting.
The BOJ currently purchases nearly ￥6 trillion in JGBs a month.
Banks to gain
The central bank's decision "would help increase long-term rates gradually, tilting in favor of banks," said Takahide Kiuchi, executive economist at Nomura Research Institute. Kiuchi expects a gradual increase in rates to support banks' lending. By gradually raising rates, the BOJ will aim to avoid any shocks to the economy and limit unrealized losses from banks' JGB holdings.
The Bank of Japan is under growing pressure to tighten its monetary policy to halt the yen's sharp fall. The US dollar has gained 11.3% against the Japanese yen since the start of the year, making imports costlier. The central bank is expected to tighten further after it abandoned its negative interest rates policy earlier this year. Combined with a possible rate cut by the US Federal Reserve later this year, the BOJ's shift away from ultraloose monetary policy settings will narrow the gulf between US and Japanese interest rates.
The BOJ is likely to diverge from other global central banks, which are widely expected to start reducing rates after they have greater certainty that inflation is getting under control. While economists marked down the timing of the Fed's rate cut, they anticipate it will take action later this year.
Life after negative rates
Japanese banks have been preparing for BOJ's exit from its negative interest rates and the central bank's yield-curve control policy. The central bank initially said in December 2022 that it will allow yields on the benchmark bond to rise to 0.5%, raising its tolerance to 1.0% later in moves seen as policy tightening even before it abandoned the negative interest policy in March. Expectations of tighter monetary policy pushed the 10-year JGB yields up to a 13-year high of 1.1% at the end of May.
The BOJ's official statement about a cutback in its JGB purchase will "stabilize the long-term yields above 1.0%," said Tsuyoshi Ueno, a senior economist at NLI Research Institute. The BOJ's one-to-two-year plan to reduce bond purchases could also make it easier for banks to nail down their strategy for JGB investment or lending, he added.
Mitsubishi UFJ Financial Group Inc., for example, expects the BOJ's March monetary policy shift to contribute between ￥40 billion and ￥50 billion to the lender's net interest income for the current fiscal year that started on April 1. The megabank estimates a further 15-basis-point increase in the policy rate to add ￥150 billion to its net interest income annually by 2027, it said at its full-year earnings announcement.