TOKYO: The Bank of Japan's pledge to conduct a "comprehensive assessment" on the impact of its stimulus measures is raising hopes among Japanese bond investors that the central bank may finally heed their call to modify its heavy-handed stimulus.
While there is no consensus on what the BOJ's next step will be, some believe it may lead to a steeper yield curve, which would benefit many investors because it produces bigger capital gains, called roll-down gains, on bonds as they near maturity.
The JGB yield curve flattened sharply earlier this year after the BOJ's surprise decision to introduce negative rates caused panic as investors rushed to buy long-dated maturities before their yields fell to what was feared would be below zero.
The yield spread between two-year and 30-year bonds, for instance, fell to a record low 0.345 percent in late June from 1.28 percent at the start of year. Historically, the spread has generally been above 1 percent.
Since then, the spread has came back up to about 0.55 percent as more investors started to contemplate the sustainability of the BOJ's bond buying programme, especially in light of the BOJ's policy review.
Many bond market participants think it is practically difficult for the BOJ to increase its intake much more, given that its aggressive buying has already sapped liquidity.
The IMF said last year that the BOJ would hit its limit in 2017-18 and that any interim increase in bond buying would hasten the day of reckoning.
"They don't really have the option of increasing bond buying. So the most feasible easing now is to cut rates further into negative," said the CEO of an asset management firm.
"Financial institutions don't like deeper negative rates, but they would tolerate them if the curve was steeper," he said.
Steepening the curve could be done by shifting the BOJ's bond buying more towards shorter maturities, within the current mandate of increasing its bond holdings by 80 trillion yen.
"I think the BOJ is now shifting its fight for achieving inflation to a long-term battle from short-term shock-and-awe tactics," said Izuru Kato, chief economist at Totan Research.
Some market players think the BOJ could attempt "stealth tapering" given that openly reducing the size of its bond purchase programme would be perceived as policy tightening - not an option for a central bank determined to boost inflation.
One face-saving measure the BOJ could take, therefore, would be to make more flexible its current policy target of increasing its bond holdings and monetary base by 80 trillion yen ($790 billion) a year, and widening the target to 70-90 trillion yen or even 60-100 trillion yen.
"To some board members, unwinding of quantitative easing would be utterly unacceptable. But they might be able to swallow it if it were pitched as technical fine-tuning," said Nobuyasu Atago, chief economist at Okasan Securities.
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