TOKYO: The Bank of Japan said on Friday it will cut the amount of its government bond purchases next month, signalling to markets that it is seeking to prevent long-term interest rates from sliding further away from its target toward record lows.
The move comes as rising fears of a global economic recession sends bond yields sliding across the world.
The yield on 10-year Japanese government bonds fell to -0.290% on Thursday. That was only a whisker away from a record low of -0.3% and well below the -0.2% level perceived by some market players as the BOJ's line in the sand.
“Markets determine bond yield levels. The recent moves show there's money sloshing around in the economy," Japanese Finance Minister Taro Aso told a news conference on Friday.
In the face of such yield falls, the BOJ announced that it will reduce the amount of five- to 10-year JGBs it plans to buy in September to a range of 250 billion yen to 550 billion yen ($2.37 bln-$5.22 bln) at each operation, from 300 billion to 650 billion in August.
The central bank also said it will conduct four buying operations for five- to 10-year JGBs in September, keeping the frequency unchanged from August.
Sliding bond yields and potential signs of global recession have added to the policy headaches facing the BOJ, which must keep pumping money aggressively to spur growth but also prevent borrowing costs from sliding too far below its target.
Years of ultra-low rates have hurt commercial banks' profits, drawing warnings even from within the BOJ that further declines in yields could do more harm than good to the economy.
Under its yield curve control (YCC) programme, the BOJ guides short-term rates at -0.1% and allows the 10-year Japanese government bond (JGB) yield to move roughly 40 basis points around a 0% target.
Some market players have been testing the BOJ's resolve to keep a floor on yields. A modest cut in the BOJ's bond buying earlier this month did little to push up the 10-year yield.
The BOJ purchases JGBs of varying maturities through market operations as part of the YCC scheme.