BOJ seen phasing out guidelines on ETF buying, focus on band on yield moves

By Kaori Kaneko

TOKYO (Reuters) - The Bank of Japan will scrap either or both of the numerical guidelines set for its purchases of exchange-traded funds (ETF) this week to make its stimulus programme more sustainable, a Reuters poll found.

A majority of economists surveyed also said the BOJ would retain the current implicit band at which it allows 10-year bond yields to rise and fall 0.2% each way around its 0% target, though some projected the central bank would widen the band.

The poll comes ahead of the BOJ's two-day rate review ending on Friday, where the central bank will unveil measures to make its yield curve control (YCC) policy and asset-buying schemes more effective and sustainable.

The BOJ currently sets two guidelines for its ETF buying, which is to buy at an annual pace of roughly 6 trillion yen ($55 billion) but up to 12 trillion yen.

Critics argue the numerical guidelines prevents the BOJ from buying ETFs flexibly, such as slowing purchases significantly when stock prices are booming.

In a March 2-16 poll, 12 of 36 analysts surveyed said they expected the BOJ to remove the 6-trillion-yen guideline.

Another seven said the BOJ would remove the 12-trillion-yen ceiling, while nine said the central bank would take out both guidelines.

"We expect the BOJ to clarify its stance that it will buy ETFs only when necessary to reduce risk premia," said Atsushi Takeda, chief economist at Itochu Research Institute.

At Friday's review, the BOJ will also discuss whether to allow 10-year yields to deviate more from its 0% target to breathe life back to a market made dormant by its dominance.

The central bank is expected to slightly widen an implicit band at which it allows long-term interest rates to move around its 0% target, the Nikkei newspaper reported on Thursday.

BOJ officials have given mixed signals on whether they could widen the 40-basis-point tolerance band.

When asked what level the BOJ would allow 10-year yields to rise to, 23 of 36 analysts chose 0.2%, six said 0.25% and seven replied 0.3% or higher.

"We expect the BOJ will allow the implicit band to widen somewhat, considering activating trades and impacts on financial institutions' profits," said Harumi Taguchi, principal economist at IHS Markit.

Global recovery hopes pushed up yields across the world including in Japan where the benchmark 10-year yield briefly rose to 0.175% last month - the highest since 2016.

Despite BOJ Governor Haruhiko Kuroda's repeated assurances the Bank would ramp up stimulus if needed to cushion the blow from the COVID-19 pandemic, over 70% of analysts polled expected the Bank's next move to be a withdrawal of stimulus.

The poll also found the economy would grow 3.8% next fiscal year, beginning in April, and 2.0% in fiscal 2022 after an expected 4.9% contraction this fiscal year.

Japan's economy has rebounded from last year's historical slump caused by the pandemic, though new COVID-19 curbs imposed since January have weighed on consumption.

Core consumer prices, which exclude volatile fresh food prices, will rise 0.4% next fiscal year and 0.5% in fiscal 2022, after a projected 0.4% fall this fiscal year, the poll showed.

(Reporting by Kaori Kaneko; Polling by Sujith Pai and Md. Manzer Hussain; Editing by Leika Kihara, Lincoln Feast, Kim Coghill)