May 23, 2017
< Review of the BOJ’s JGB Purchases >Pace of Increase in BOJ’s Holding of JGBs Slowing— Does the purchase limit risk still remain?
Ikuko FUEDA-SAMIKAWA (Principal Economist)1
Tetsuaki TAKANO (Economist)2

The pace of increase in the outstanding long-term Japanese government bonds (JGBs) held by theBank of Japan (BOJ) is slowing. The BOJ Governor Haruhiko Kuroda told the House ofRepresentatives’ Financial Affairs Committee Meeting on May 10 that the increase in the amountoutstanding of its JGB holdings is “now at around 60 trillion yen per year.” Since the BOJ announced
in its latest monetary policy statement that it “will conduct purchases more or less in line with thecurrent pace -- an annual pace of increase in the amount outstanding of its JGB holdings at about 80
trillion yen,” Kuroda insisted again that its JGB purchase amount was merely a goal. In September
2016, the BOJ introduced new policy framework called “Quantitative and Qualitative Monetary
Easing with Yield Curve Control (YCC)” and changed its operation target from “volume of monetarybase” to “interest rate.” As a consequence, the amount of the BOJ’s JGB purchases became“dependent variable,” endogenously determined by economic and financial market trends. In thisreport, we look at the BOJ’s purchases of JGBs since September 2016.

Pace of Increase in JGB Holdings Slowed after YCC
At the end of March 2017, the outstanding JGBs held by the BOJ amounted to 367.7 trillion yen ona face value basis. Of these, 43.6 trillion yen of JGBs will be removed from the BOJ’s balance sheetby the end of March 20183. This means that if the BOJ intends to increase its JGB holdings strictly by80 trillion yen by the end of FY2017, the BOJ will need to purchase JGBs exceeding 123 trillion yenby March 20184. However, with the introduction of YCC in September 2016, the target in the BOJ’s
money market operations replaced “volume” with “interest rate.” Prior to the introduction of YCC, theBOJ continued to announce that it would conduct operations so that “the monetary base will increaseat an annual pace of about 80 trillion yen.” With the introduction of YCC, however, the purchase
1Principal Economist, Research Director of Financial Research Team（samikawa@jcer.or.jp）
Economist, Lead Researcher of Financial Research Team
3Compared with the end of March 2016, the amount of JGBs that will mature within one year has increased by over 5trillion yen. At the end of March 2016, out of the 295.4 trillion yen of long-term JGBs held by the BOJ, 37.9 trillion yen
reached maturity by end of March 2017 (all amounts are based on face value).
4In addition to the long-term government bonds that have reached maturity, the fixed amount for those purchased by theBOJ at a higher price than the par value in the past (redemption loss) is also removed from the balance sheet every year. Thisis accounting treatment under the amortized cost method adopted by the BOJ.
2

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amount became merely a goal in that the BOJ stated that it “will conduct purchases more or less inline with the current pace -- an annual pace of increase in the amount outstanding of its JGB holdings
at about 80 trillion yen.” Figure 1 shows the increasing pace of JGBs held by the BOJ from the samemonth of the previous year. With the start of YCC, the pace has been slowing. If this pace continues,
the annual increase will decline to around 60 trillion yen.
Fig.1 Pace of Increase of the BOJ’s JGB Holdings (Increase From the Previous Year)85(Change from previous year, Trillion yen)
BOJ's JGB Holdings (Change from previous year)
YCC

80
75
70
65
15/11

16/01

16/03

16/05

16/07

16/09

16/11

17/01

Source: Bank of Japan

17/03 17/04

Monthly

Is it possible for the BOJ, which already holds nearly 40% of the total amount issued, to continue
JGB purchases of about 60 trillion yen annually? In the “Summary of Opinions at the Monetary PolicyMeeting” for the 2017 April meeting, which was released on May 10, a policy board member statedthe cautious opinion that “Unless the pace of JGB purchases is further decelerated, the sustainability
and stability of the purchases will not be secured through the next year. The supply-demand conditionsin the JGB market will tend to tighten further in terms of “flow,” as the gross amount of JGB issuanceby the government is to be reduced, as well as in terms of “stock,” as the room for a further reductionin the JGB holdings by the private sector is narrowing.”

Reduction of JGB Purchase Amount Became Clear
Under YCC, the BOJ applies a negative interest rate of minus 0.1 percent to the Policy-Rate
Balances in current accounts held by financial institutions at the BOJ along with purchasing JGBs sothat 10-year JGB yields will remain at around zero percent. From the trend of 10-year JGB yields after
the introduction of YCC as shown on the right side of figure 2, it seems that the BOJ assumes therange of minus 0.1% to plus 0.1% as “zero percent.” As 10-year JGB yields have been slightly above
0% in May, the reduction trend in the BOJ’s purchases of JGBs is becoming clearer.

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Fig.2 10-Year JGB Yields
1.0(%)
Long term interest rate

0.8
0.6

0.2

(%)

0.1

0.4

YCC

0.2
0.0

0.0
-0.2
-0.4
13/01

(Daily)

13/07

14/01

14/07

15/01

15/07

16/01

16/07

-0.1
16/09
17/0117/05(Daily)
16/11

17/01

17/03 17/05
17/0

Note: Data is until May 23, 2017. The red vertical lines in the figure on the right show the dates when the BOJ conducted“fixed-rate” bond-buying operations (November 17, 2016 and February 3, 2017).
Source: Bloomberg

Figure 3 shows the breakdown of JGBs on a purchase price basis since February 2016, just after theintroduction of the negative interest rate policy5. The cumulative JGB purchase amount from October
2016 to April 2017 decreased by about 5 trillion yen compared to the cumulative amount for the 7months from March 2016 to September, before the introduction of YCC. The purchase of 3-5 year
JGBs is mainly decreasing. Under YCC, the guideline for the average remaining maturity of the BOJ’s
JGB purchases is abolished, while JGBs with a wide range of maturities are eligible for purchase.
Looking at the monthly weighted average yield of JGBs purchased by the BOJ, it can be seen that itwas negative from March 2016 to November 2016 (the black line in figure 3). Under the negativeinterest rate policy, the average yield was also negative. During this period, the BOJ purchased JGBs
with negative interest rates from financial institutions and others. At the same time, it imposed anegative interest rate on the Policy-Rate Balances in the current account of the BOJ. However, since
the average yield of JGBs purchased by the BOJ was below minus 0.2 percent in July 2016, forexample, it is likely that a loss occurred in the BOJ’s purchases under the negative interest rate.
Although the monthly weighted average yield of JGBs purchased by the BOJ became positive at theend of 2016 and remained positive for a while, it became negative again to minus 0.003% in April,along with the decline of the long-term interest rate.

5The BOJ named its negative interest rate policy “Quantitative and Qualitative Monetary Easing with Negative InterestRate.”

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Fig.3 Cumulative Amount of JGB Purchases Decreased by 5 Trillion Yen after YCC
1210(Trillion yen)

(%)
YCC

0.30.2

80.1

60.0

4-0.1

2-0.2

0-0.3
16/02 16/03 16/04 16/05 16/06 16/07 16/08 16/09 16/10 16/11 16/12 17/01 17/02 17/03 17/04 (Monthly)
26 years～11 years～25 years
6 years～10 years
4 years～5 years
2 year～3 years～1 yearAverage rate of yield(RHS)

Note: The amount is shown on a purchase price basis. For details, see Samikawa et.al (2017).
The figure excludes floating rate bonds and inflation-indexed bonds.
Source: Bank of Japan “Japanese Government Bonds Held by the Bank of Japan,” “Operations,”
The Japan Securities Dealers Association “Reference Statistical Prices (Yields) for OTC Bond
Transactions/Rating Matrix”“Inflation-Overshooting Commitment” is Exceptional Forward Guidance
Since the publication of the “Comprehensive Assessment” in September 2016, the BOJ continues tostate that Japan’s economy is no longer in deflation, which is commonly defined as a sustained decline.
However, with either the CPI core rate (all items less fresh food) or with the BOJ’s CPI core rate (allitems less fresh food and energy), achieving the target of 2% is still a milestone (Figure 4).
The current BOJ’s “inflation-overshooting commitment” can be described as a forward guidance
based on the observed value of the consumer price inflation rate, not on the inflation outlook. To put it
another way, it is a backward-looking commitment, not a forward-looking commitment. In Japan,people’s expectation formation is likely to be dragged in the past; this is called “adaptive” expectation
formation. The mechanism of formation of inflation expectations in Japan tends to be heavily
influenced by the course of the past inflation rate. Kuroda said in a speech on March 24, “Consideringthat it takes some time for monetary policy to have an impact on economic activity and prices, it isexceptional for a central bank to make such a strong commitment that is based on the observed CPI6.”
While Kuroda is making a strong commitment, he also has sent a message stating that the BOJ will
not face difficulties buying JGBs in the near future. The reason behind this message seems to be that if
long-term interest rates rise sharply due to confusion in the market, for instance, the BOJ’s JGB
purchases will be approaching the limit. For similar reasons, Kuroda maintains a cautious stance about
concrete discussions on the exit as “too early.”

6Professor Kenneth Rogoff of Harvard University, ex chief-economist at the IMF, said in his recent book The Curse of Cash,“The main practical problem with both types of forward guidance is that it is hard for the central bank to credibly makepromises in a world where there is regular turnover of policy board members, not to mention of the politicians who
ultimately oversee central banks.”

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Fig.4 Year-on-Year Rate of Increase in CPIs---Still a Long Way to Exceed the 2% Target
3.0(YoY, %)

2.5

Core CPIBOJ Core CPI (2010 base)

BOJ Core CPI (2015 base)Price Stability Target

2.0
1.5
1.0
0.5
0.0
-0.5

(Monthly)

-1.0
13/01
13/07
14/01
14/07
15/01
15/07
Source: Ministry of Internal Affairs and Communications “Consumer Price Index”
Bank of Japan “Measures of Underlying Inflation”

16/01

16/07

17/01
17/03

The First Step of the Exit Strategy - Kuroda Clarified the Conditions for Starting theDiscussions
At a press conference on April 27, Kuroda said, “I think that the realization of the ‘Price Stability
Target’ of 2% will be the beginning of the discussions about the exit.” In terms of clarifying theconditions for starting the exit discussions, it seems that Kuroda’s remarks can be regarded as the firststep of the exit strategy. Under the current inflation-overshooting commitment, the BOJ insists that it“will continue expanding the monetary base until the year-on-year rate of increase in the observed CPI
inflation rate (all items less fresh food) exceeds the price stability target of 2% and stays above thetarget in a stable manner.” The discussion on the exit is likely to be put off until then. Details of exit
strategies are ahead, such as whether the BOJ should raise the policy rate first or start shrinking its
balance sheet first, judged based on the economic situation at the time. From a number of remarks
made by Kuroda, it appears that he does not intend to make the financial market volatile
unnecessarily.
On approaching the exit, discussions about the future loss incurred by the BOJ, the independence ofthe central bank, communication strategies on how to convey the fact to the markets and the public,
and monetary policy rules for normalizing interest rates and balance sheets could heat up.
Representative Seiji Maehara of the Democratic Party of Japan said at the House of Representatives’
Financial Affairs Committee Meeting on May 10 that based on the BOJ’s data, “the average remaining
maturity for the long-term JGBs held by the BOJ is now 7.44 years and their weighted average yield is0.415%.” When the interest rate on the current account of the BOJ exceeds 0.415% in the process ofthe normalization of interest rates, the BOJ is likely to suffer a loss. Kuroda answered in theCommittee that the assessment loss caused by the BOJ’s holding JGBs would be about 23 trillion yen
if the interest rate rose by 1 percentage point. Although this is not directly reflected in its income

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statement as a loss, it is highly significant for the BOJ to inform the public about the scale of future
losses in advance.
The 2017 Financial Research Team of JCER is going to analyze the exit strategy in Japan while
examining the exit strategy of the Federal Reserve Board (FRB).

<Reference>
Rogoff, K. (2016), The Curse of Cash, Princeton University PressIwata, K., Fueda-Samikawa, I., and Takahashi, E. (2017), “Narrowing Monetary Policy Options- Can
FTPL be an effective means of escaping deflation?”, Japan Center for Economic Research
Iwata, K., Fueda-Samikawa, I., and Takahashi, E. (2016), “BOJ’s JGB Purchasing Limits to be
Reached in Summer 2017- Is the Bank carrying out Fiscal Policy?”, Japan Center for
Economic ResearchCopyright © 2017 JCER______________________________________________________________________________________
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