The central bank is scheduled to review policy on April 3-4, the first meeting led by new BoJ Governor Haruhiko Kuroda, who has a mandate from Prime Minister Shinzo Abe to take bolder action to pull Japan out of nearly two decades of deflation. Kuroda has said the BoJ will seek to push down yields across the curve by purchasing longer-dated bonds, and that he will act with speed to achieve the central bank's 2 percent inflation target in two years. Sources familiar with BoJ thinking say it is likely to increase the amount of assets it buys and to extend the duration of bonds it targets to five years or even longer, from the current three years.
"If the BoJ were to increase asset purchases, it will likely target longer-dated government bonds," said a source. The sources spoke on condition of anonymity due to the sensitivity of the matter. In doing so, it is likely to switch to open-ended asset purchases immediately, rather than wait for the original start date of 2014. Making policy open ended is designed to show the central bank's increased determination to reinflate the economy.
Its current policy is not open ended. Rather it has set a limit of pumping 101 trillion yen ($1 trillion) into the economy by the end of this year through an asset-buying and lending programme. Market expectations that Kuroda will drive the BoJ into buying bonds more aggressively have pushed 10-year bond yields to a near-decade low.
The BoJ will also consider next week combining its two bond-buying programmes, so that it can buy longer-dated debt more easily and clarify how much it is expanding its balance sheet. It already plans to buy 44 trillion yen in bonds under its existing asset-buying programme by the end of this year.
Under its "rinban" market operation - which is not tied to monetary policy - it buys 21.6 trillion yen of bonds annually. With the two schemes combined, the BoJ hopes to give a clearer picture of how its balance sheet is expanding as a measure of how aggressive it is being to tackle the country's deflation. So the board may set as a target the monthly amount of bond purchases or the balance of its total asset holdings, or even indicate both, although no decision has been made yet, the sources said.
Board member Sayuri Shirai had proposed combining the two bond-buying programmes at a policy review last month. Her proposal was rejected by a 1-8 vote but Kuroda told parliament on Tuesday the idea was worth studying, raising the chance it could be adopted as early as next week. The board generally agrees on the need for bolder action, but it has been divided on what the next step should be.
Kuroda, who assumed the post last week, has yet to discuss his plans in depth with other board members and may face resistance from those worried about making the leap too soon to combine the bond buying programmes or buy longer-dated bonds too far down the yield curve.
The BoJ has been reluctant to buy longer-term bonds for the purpose of monetary easing out of concern it could bind its hands for longer than it wants and make a future exit from ultra-loose policy difficult. The central bank's massive quantitative easing programme between 2001-2006 was mostly conducted through short-term bills.
Some on the board also worry buying longer-term debt will bring the BoJ closer to monetising debt, or directly underwriting government bonds, which could upset markets. But Kuroda has stressed the need to buy longer-dated bonds to push down the longer end of the yield curve. He has also said it was confusing to have two separate bond-buying operations.