BoJ silently tapering? - BAML

The  BofA Merrill Lynch Global Research team explained that in today’s long-term JGB purchase operation, the BoJ declined to make an offer on bonds with remaining maturities over 1yr and up to 5yr. 

Key Quotes:

The 27 January purchase operation is expected to be the last one this month, so JGB purchases in the 1yr-5yr range, which have been carried out six times monthly up to now, will probably be carried out only five times this month. We have pointed out that we expect the BoJ’s bond purchases to be reduced, and that reductions would probably be made across the entire curve, including the short and medium sector.
 
We thought the purchasing cutback might come in March, when JGB demand tends to be heightened at the end of the fiscal year, or in April, when issuance will decline, but it happened earlier than we foresaw. 

Given the BoJ’s purchases and foreign investors’ aggressive buying this sector was running out of saleable bonds, so the BoJ might have decided to reduce its purchases before its operations were undersubscribed. Another possibility is that the BoJ judged this sector’s yields to be too low relative to the yield curve it desires. Also, the BoJ might have wanted to make this move while the Trump market was helping to keep the yen weak. 

The BoJ releases its “Outline of Outright Purchases of Japanese Government Securities” at the end of each month, and although the number of monthly operations was previously given as “about 6,” it changed to “about 5-7” in the end-of December release, which indicates that the BoJ might have been planning in advance for this reduction.

The BoJ already holds about 40% of outstanding long-term JGBs, and that proportion rises to 46% among maturities up to 10yr. If purchases of maturities over 1yr and up to 5yr are reduced to five times monthly, the BoJ’s holdings of JGBs will increase by about ¥60trn annually, far short of ¥80trn. Even so, the share of outstanding JGBs in the BoJ’s hands will continue to increase. Based on the government’s FY17 JGB issuance plan, the net supply of long-term JGBs will be about ¥25trn, so the BoJ’s purchases will continue to be a gigantic market presence. 

On a gross basis, if the BoJ were to continue its purchasing operations six times monthly, it would purchase 109.1% of issuance in the 1yr-3yr maturity range, and 114.5% in the 3yr-5yr range. By reducing operations to five times monthly, its purchases in those ranges will amount to 90.9% and 95.5% of issuance, respectively, thus staying under 100% (Table 1). If the BoJ aims to shift from a policy of excessive monetary easing to sustainable easing, this purchase reduction looks like a reasonable way to do it. Even after the reduction, the BoJ’s purchases will be large. With the passage of time, the BoJ might well look for other opportunities to reduce its JGB purchases."