The Bank of Japan’s efforts to ensure liquidity for businesses and suppress yields in the corporate debt market could soon leave it owning almost half the country’s outstanding commercial paper and about one-sixth of its corporate bonds.
Under the BoJ’s plans, announced on Monday, the central bank will increase its existing holdings of commercial paper and corporate bonds from around ¥5tn ($46bn) to as much as ¥20tn. The move is designed to complement easing policies that have seen the central bank build its holdings of Japanese government bonds (JGBs) to about 50 per cent of the entire market. It forms part of a controversial 10-year programme in which the BoJ has accumulated a roughly ¥30tn stash of equities through buying exchange traded funds.
At the same time, the central bank said it would scrap its ¥80tn cap on annual JGB purchases as it steps up its response to the coronavirus pandemic.
According to Naka Matsuzawa, a strategist at Nomura, the move in corporate bonds means that pension funds and life insurers will be competing with the BoJ in Japan’s relatively small domestic market, which runs to about ¥60tn in corporate bonds and ¥20tn in CP, where maturities are less than one year. To that extent, the effects should be positive, he said.
The central bank’s announcement marked a bigger escalation of its corporate-bond buying programme than most analysts and traders had expected. Under the BoJ’s previous guidelines, it had allowed itself a maximum ¥7tn of CP and corporate bonds. The near-tripling of that upper limit could imply buying sprees of ¥7.5tn in both asset classes.
In an additional display of intent, the BoJ said it would lengthen the maturity of corporate bonds it can hold to as much as five years. It will also raise its maximum ownership of a single issuer’s CP or corporate bonds to 50 per cent and 30 per cent, respectively.
Mr Matsuzawa noted that given that most large companies in Japan have their funding needs met by banks, spreads in the bond market are unlikely to react sharply, however aggressively the BoJ acts.
Nonetheless, there have been recent signs of strain, which the BoJ may be looking to ease. In October last year, for example, Toyota’s financial arm was able to issue three-year paper with a yield calculated at 0.0000000091 per cent — a level that meant that if an investor bought ¥1bn of its bonds and held them until maturity they would barely make a single yen in interest.
Earlier this month, however, Toyota Finance Corp sold ¥55bn of three-year bonds with a yield of 0.19 per cent — the highest since 2013.
Kiichi Murashima, Citigroup’s Japan economist, said the BoJ’s new measures would probably have a limited impact on overall financial conditions. The central bank’s actions were probably motivated by the need to be seen to be acting as energetically as peers, he said. Both the US Federal Reserve and the European Central Bank have policy meetings scheduled this week.
“CP and corporate bonds play a much more limited role in financial intermediation in Japan than in the US,” Mr Murashima noted.
Nomura’s Mr Matsuzawa agreed, saying the move was unlikely to stir much activity in Japan’s bond market “and any additional effect in bolstering the economy overall is likely to be minimal”.