(Bloomberg) -- The slump in global yields as investors seek out trade-war havens is increasing speculation in Tokyo the Bank of Japan may cut bond purchases again in June.
The central bank could lower the target purchase range for 10-25 year maturities in its monthly plan on Friday, according to Naomi Muguruma, senior market economist at Mitsubishi UFJ Morgan Stanley (NYSE:MS) Securities. Japan’s 20-year yield fell to 0.30% on Wednesday, the lowest since August 2016.
“Speculation lingers the BOJ will slightly cut its purchase range for super-long maturities in June, or cut buying at its operations if yields don’t stop declining,” Muguruma said. “The BOJ has said an excessive fall in yields that leads to a flattening curve could build up side-effects in the financial system.”
Re-ignited trade tensions between the U.S. and China, and faltering global growth, have seen a surge in demand for government bonds this month with yields slumping across the world. Ten-year Treasury yields have fallen over 30 basis points since mid-April to 2.26% on Wednesday, while similar-maturity yields in Australia and New Zealand both dropped to records.
The BOJ altered its monthly bond-buying plan for a second time this year in April, paving the way for it to buy less debt in May, as the nation’s benchmark yield remained below its zero percent target.
It will hold its last regular purchase operations for the month on Friday, before announcing the June plan later that day. The 10-year JGB yield traded at minus 0.10% Wednesday, close to its lowest since August 2016.
Tight Market
A cut in purchases in 10-25 year maturities wouldn’t be a surprise given the very tight supply/demand balance in that sector, Muguruma said. A reduction to zero in the lower end of the target range for maturities over 25 years -- currently 10 billion to 100 billion yen -- would likely be too bold, given the caution the central bank has shown, she said.
Still, not everyone expects a reduction. Satoshi Shimamura, head of rates and markets at Nippon Wealth Life Insurance Co., sees the BOJ standing pat, as the central bank has reiterated its annual target of 80 trillion yen ($732 billion) in bond purchases.
“There is no reason to further cut purchases right after having confirmed the target,” he said. “The BOJ may also be mindful of the impact to the currency from a purchase reduction.”
The central bank’s purchase reductions in February and April coincided with an uptrend in the dollar-yen. The currency pair has fallen about 2% this month, thanks to the yen’s status as a haven in times of market turmoil.