Markets brace for cut to BOJ's super-long bond buying

By Leika Kihara and Takahiko Wada

TOKYO (Reuters) - The Bank of Japan could take another key step toward diminishing its huge presence in the bond market next week, when it releases its bond-buying plan for the second quarter that may include a cut in the size of super-long bond purchases, analysts say.

Under a quantitative tightening (QT) programme laid out in July, the BOJ has been slowing bond purchases by around 400 billion yen ($2.65 billion) per quarter to halve monthly purchases to 3 trillion yen by March 2026.

But it has refrained from reducing purchases of super-long government bonds as it focused on tapering other maturities, particularly the benchmark 10-year notes it has amassed during a massive stimulus programme that ended in March last year.

Reducing purchases of super-long bonds would reinforce the BOJ's resolve to continue policy normalisation by phasing out remnants of a decade-long stimulus programme undertaken by former Governor Haruhiko Kuroda since 2013 to break Japan out of deflation and economic stagnation.

Having made progress in tapering shorter-dated bonds, the BOJ may begin reducing purchases for super-long bonds with maturity of 10-25 years as soon as in April, said analysts and sources familiar with the central bank's thinking.

The BOJ will announce on Monday its bond buying plan for the April-June period that includes a breakdown of how much it will keep buying for each maturity zone.

Katsutoshi Inadome, senior strategist at Sumitomo Mitsui Trust Asset Management, expects the BOJ to start reducing purchases of super-long bonds from the April-June quarter.

"Any such move would herald the start of a full-fledged reduction in the BOJ's super-long bond buying, and trigger a sell-off in bonds of that zone," he said.

In the current quarter, the BOJ buys 4.5 trillion yen worth of bonds per month, of which 450 billion yen are those with maturity of more than 10 years and up to 25 years - categorised as super-long bonds.

The BOJ last year pulled short-term rates out of negative territory and ended a policy capping bond yields around zero, on the view Japan was on the cusp of durably hitting its 2% inflation target.

It raised its short-term policy rate to 0.5% in January and signalled readiness to keep hiking rates if economic and price developments move in line with its forecasts.

Aside from hiking short-term rates, the BOJ is seeking to gradually reduce the size of its huge balance sheet. It owns roughly half of outstanding JGBs in the market with its bond holdings now around 600 trillion yen - roughly the size of Japan's gross domestic product (GDP).

While market bets of a near-term rate hike have pushed up long-term rates this month, such market moves alone won't prevent the BOJ from tapering steadily, one of the sources said.

Prospects of further rate hikes have pushed the 10-year JGB yield to a more than 15-year high of 1.59% on Thursday, before falling to 1.565% on Friday.

The BOJ's current QT plan runs through March 2026. Its taper plan for April 2026 onward will be decided in June.

($1 = 150.8100 yen)

(Reporting by Leika Kihara and Takahiko Wada, additional reporting by Takaya Yamaguchi; Editing by Shri Navaratnam)