BOJ to trim October buying of super-long JGBs to two-year low

By Hideyuki Sano

TOKYO (Reuters) - The Bank of Japan said on Friday it plans to trim buying in long-dated Japanese government bonds (JGBs) in market operations in October to its lowest level since 2014, a move that is seen aimed at steepening the yield curve.

The move is one of the first steps the BOJ has taken to adjust its operations after it rebooted its policy framework last week by introducing a target for 10-year JGB yields of around zero percent.

The BOJ said it would reduce its purchase of JGBs with more than 10 years to maturity to 300 billion yen (2.29 billion pounds) in its initial market operation in October, compared with 320 billion yen in recent months.

That is the smallest amount of buying in those maturities since the BOJ boosted the pace of its bond buying in October 2014.

And it is 32 percent less than its peak purchases of 440 billion yen each month in January-March.

Coupled with its existing policy of imposing negative interest rates of minus 0.10 percent on a portion of banks' deposits at the central bank, the BOJ has touted its new policy as "yield curve control".

The BOJ last week ditched its explicit main policy target of increasing its bond holdings by 80 trillion yen ($792.2 billion)a year as well as its commitment to keep the average maturity of bonds it buys between 7 to 12 years.

While markets feared that meant the BOJ will soon begin scaling back its massive bond purchases, Governor Haruhiko Kuroda said on Monday that no big increases or decreases were expected for now.

"We reduced buying so that the JGB yield curve will not move away widely from its level at the time of the policy meeting in September," a senior official at the BOJ told reporters on Friday.

Since the BOJ's meeting last week, the 20-year and 30-year JGB yields have fallen the most, by almost 6 basis points.

Earlier in the day, the BOJ also reduced its buying of JGBs with five to ten years to maturity by 20 billion yen to 410 billion yen in its bond buying operation on Friday, compared with 430 billion yen since July.

The move came after the 10-year JGB yield fell to as low as minus 0.090 percent on Thursday and reinforced views that the BOJ will aim to keep it above minus 0.10 percent for now.

"Minus 0.10 percent was perceived as a milestone in the market, so the BOJ appeared to be trying to rein in the fall in yields," said Keiko Onogi, a senior bond strategist at Daiwa Securities.

The purchase plan, if maintained throughout the month, would mean the BOJ would buy 9.02 trillion yen of JGBs, about 2 percent less than its buying in recent months.

That would be the lowest since December 2015, when the central bank bought 8.65 trillion yen, excluding inflation-linked bonds and floating rate bonds.

So far this year, the BOJ has bought roughly 9-10 trillion yen of JGBs every month.

Although the BOJ said it would maintain the pace of its bond buying for the time being, many market players expect the BOJ to have no choice but to gradually reduce its bond buying.

Analysts at Mizuho Research calculate that the BOJ will eventually have to reduce its annual bond increase to 20-30 trillion yen per year from the current 80 trillion yen.

(Reporting by Hideyuki Sano, additional reporting by Sumio Ito; Editing by Shri Navaratnam and Kim Coghill)