Bank of Japan Raises Bond Buying as Stimulus Looms

The Bank of Japan said on Wednesday it would increase purchases of government bonds by almost a third to "smooth market operations" as the government prepares more spending to cushion the country's worst recession since World War Two.

The central bank raised the value of JGBs it would buy to 1.8 trillion yen ($18.3 billion) a month from 1.4 trillion yen. They kept interest rates unchanged at 0.1 percent expected.

The BOJ started buying JGBs more than four decades ago as part of its market operations and expanded purchases earlier this decade when Japan experimented with quantitative easing to revive demand after an property bubble burst in the 1990s.

The Bank of Japan's step mirrors those of other other big central banks that are buying assets and expanding their balance sheets to try to pull economies out of a global slump triggered by a meltdown in the U.S. mortgage market. 

The Bank of England is buying government bonds and the U.S. Federal Reserve has said it may consider doing the same.

The BOJ said the latest expansion in JGB buying was designed to "smooth market operations". It did not elaborate and made no link to the economic stimulus spending Prime Minister Taro Aso is considering, but analysts were more direct.

"The government is mulling huge spending to bolster the economy. The BOJ's decision can be interpreted as an effective monetisation of government debt, although the central bank will never say so because it is independent from the government," said Junko Nishioka, chief Japan economist at Royal Bank of Scotland.

"Today's announcement shows the BOJ is doing more than what the markets expected to strengthen monetary easing," she said.

Benchmark 10-year JGB yields edged down from a one-month high of 1.320 percent to hold near 1.300 percent on expectations of the increase in central bank buying. 

Worries about looming supply to pay for government stimulus had pushed yields up from a 3-1/2-year low of 1.155 percent hit in December.

Not Aimed At Yields

"When the government's fiscal stimulus is expanding so much, usually bond markets would factor in the risk premium from fiscal policy. But with the BOJ effectively stepping towards monetising debt, bond yields are unlikely to rise much from such risk premium," Nishioka said.

The BOJ has said its JGB buying is just one of its many market operation tools to provide funds to money markets and is not aimed directly at pushing down bond yields.

It has also said it has no intention of monetising government debt.

In the last quarter, the Japanese economy sank at its fastest rate since the 1974 oil crisis, shrinking about twice as much as the United States and the euro zone, due to its heavy reliance on exports to grow.

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Gross domestic product contracted 3.2 percent in the fourth quarter and economists fear a rising pile of unsold goods could signal a similar contraction in January-March.

The central bank is worried that a credit squeeze, on top of sliding sales, could send more Japanese companies to the wall.

On Tuesday the BOJ offered up to 1 trillion yen in subordinated loans to Japanese banks to bolster their depleted capital, seeking to prevent a drying up of lending to companies and households in need of cash.

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