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The Bank of Japan (BOJ) kept its bond purchases untouched on Thursday, relieving tension of the market that speculated it is planning to tighten its extremely loose monetary policy.

The central bank retained the amount of its buying in 1-3, 3-5, and 5-10 year Japanese government bonds (JGB) at ¥250 billion ($2.25 billion), ¥300 billion ($2.70 billion) and ¥410 billion ($2.69 billion) respectively.

JGB futures gained 0.1 percent to ¥150.50, following the announcement. It has recovered some of its losses during the past two days, after the market received a major shock from BOJ’s decision to reduce its long-dated JGB purchases on Tuesday.

The bank stated that it will cut back JGB offers with 10 to 25 years until maturity and those with 25 to 40 years left by ¥10 billion ($90 million) each. As a result, BOJ would be buying ¥190 billion ($1.71 billion) worth instead of the expected ¥200 billion ($1.80 billion).

This was enough to cause nervous chatter in the market, as investors believed that Japan’s central bank has started tapering its bond buying surreptitiously, thereby successfully tightening stimulus.

Moreover, BOJ was reportedly engaged in the so-called stealth tapering of JGB purchases since shifting its focus from financial base to rate controls in September 2016. JGB holdings used to reach an ¥80 trillion clip, but now the momentum slowed down to ¥50 trillion range.

The announcement helped raised the yen and yields, with the currency hitting six-week highs of 111.27 against the dollar on Wednesday.

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A number of traders speculated that BOJ is likely to maintain its gradual reduction in bond buying, given that the bank already has half of the market, after several years of extensive bond purchase.

Senior economist Takehiro Noguchi said that BOJ will have to reduce bond buying further, adding that it might also want to steepen the yield curve, within the limit of not making it look like it is tightening policy.  

Several market participants are expecting that the BOJ will lift its target level for long-term yields from the current threshold of around 0 percent. Senior economist Hiroshi Ugai estimated hikes of 0.25 percent in September and December.

Chief economist Nobuyasu Atago also sees the bank setting a guidance target of about 0.2 percent by mid-year.

Survey conducted by an economic research organization showed that 15 out of 39 economists expected that rate control will increase sometime this year.

Chief economist and strategist Dr. Allen Sinai expects BOJ to become less accommodative in the next 3 to 6 months, which would allow interest rates to rise while placing an upper limit.

BOJ Governor Haruhiko Kuroda stated in December that the central would not hike rates just for the reason that the economy is flourishing, because its main target is inflation.  

Inflation is still well below the bank’s 2 percent target, but it has grown steadily throughout the previous year, reaching 0.9 percent in November. Sinai expects inflation to hit 2 percent before BOJ’s estimated time frame of around the fiscal year starting April 2019.

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