Bank of Japan may increase bond-buying next week to help counter coronavirus fallout, sources say

The Bank of Japan may top up purchases of commercial paper and corporate bonds next week, sources familiar with its thinking said, as markets show increasing signs of strain due to fears over the widening fallout from the coronavirus outbreak.

The move will be part of a package of monetary easing steps the central bank is expected to take at its March 18-19 policy meeting, which is also likely to include a pledge to ramp up purchases of exchange-traded funds (ETF).

The BOJ holds roughly 2.2-trillion yen ($28-billion) in commercial paper and 3.2-trillion yen ($40.9-billion) in corporate bonds. It now pledges to buy such assets to maintain the balance of its holdings at the current size.

The central bank may pledge to accelerate the pace of buying and increase the balance of its holdings at next week’s policy meeting to ensure companies do not face trouble procuring funds, the sources said.

“It’s not as if Japanese companies are struggling to issue [commercial paper] and corporate bonds now. But more of them are keen to do so to ensure they have sufficient cash,” one of the sources said on condition of anonymity due to the sensitivity of the matter.

“The BOJ will likely take targetted steps to ensure financial conditions don’t tighten in Japan,” another source said, a view echoed by the first source.

World stocks were set on Friday for their worst week since the 2008 financial crisis, with coronavirus panic-selling hitting nearly every asset class and investors fretting that central bank action may not be enough to soothe the pain.

The rout even triggered a sell-off in near risk-free assets like Japanese government bonds (JGB), which saw prices tank as investors sold them to book profits to offset losses in stocks.

The BOJ conducted unscheduled bond buying to stem the rise in yields, its first such action since 2018. But that did little to calm market nerves, as firms and investors sought to load up on cash as a precaution against market volatility.

Under a policy dubbed yield curve control, the BOJ guides short-term interest rates at -0.1 per cent and 10-year government bond yields around zero. It also buys or holds risky assets such as ETFs, CP and corporate bonds to funnel money to markets.

The BOJ has been under pressure to follow in the footsteps of other major central banks in ramping up stimulus as volatile markets and the fallout from the epidemic threaten to push Japan’s economy into recession.

The central bank is expected to revise down its assessment of the economy next week from its current view that it is “expanding moderately as a trend,” the sources said.

Many BOJ policy makers, however, are wary of deepening negative rates for fear of straining already weak regional banks by narrowing their margins. That leaves an increase in asset purchases as among the few tools left for the BOJ to prevent business sentiment from worsening further, analysts say.

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