Bank of Japan (BOJ) officials see significant scope to boost government bond purchases if needed to achieve their inflation target, according to people familiar with the discussions, signaling little concern with perceptions of underwriting fiscal deficits.
While no decision will be made until the central bank has more time to assess price trends, the current pace of asset purchases — equivalent to 70 percent of new government-debt issuance — is not a limit for many officials, according to the people, who asked not to be named as the talks are private.
Some officials highlight the size of the market, offering plenty of room to buy more, according to the people. The bank in September reported that it held 15.4 percent of the ￥969 trillion (US$9.4 trillion) of government bonds outstanding.
With most economists surveyed by Bloomberg News anticipating Bank of Japan would escalate its stimulus after a bump in the national sales tax in April, focus is increasing on how the central bank will execute such a move.
Along with Japanese government bonds, the central bank has been purchasing equities through exchange-traded funds and real-estate investment trusts.
“The BOJ has a completely different mindset than in the past,” said Masamichi Adachi, a senior economist at JPMorgan Chase & Co in Tokyo. “There is no way back — the central bank has to continue easing until it achieves its price target.”
Forecast to leave policy unchanged at a two-day meeting scheduled to start today, the bank has already unveiled monetary easing that is unprecedented for Japan, as the central bank chases a goal of driving 2 percent inflation in about two years. The bank is targeting a ￥50 trillion increase in bonds outstanding per year.
The yield on 10-year government bonds touched a record low of 0.315 percent on April 5, the day after the central bank unleashed its record easing program, before climbing to a one-year high of 1 percent on May 23. Yesterday, the debt traded at 0.66 percent as of 2:11pm in Tokyo.
Japanese Prime Minister Shinzo Abe’s government has already unveiled a stimulus package to help Japan weather the tax increase that, while helping to improve the nation’s finances, is forecast to trigger a one-quarter contraction in the world’s third-biggest economy.
The central bank will assess conditions after the tax increase to judge whether efforts to reach its inflation target are at risk and whether any extra easing is needed, the people said. The bank has made it clear it will not take any incremental step, they said.
Meanwhile, Japan reported the biggest November trade deficit on record as imports climbed 21.1 percent from a year earlier, supported by demand ahead of a sales-tax increase in April.
Government figures showed a 35.1 percent year-on-year rise to a ￥1.29 trillion deficit, the worst result for November and the 17th straight month of shortfall — the longest stretch since comparable data began more than three decades ago.
Japanese energy imports surged after the 2011 Fukushima crisis forced the shutdown of nuclear reactors, which once supplied a third of the nation’s power.
A sharp decline in the yen, which is good for exporters’ profitability, has also forced up the cost of importing pricey fossil fuels to plug the country’s energy gap.
Additional reporting by AFP