Liquidity in Japanese Government Bond market

JGB market volatility this year has drawn complaints about the BoJ's massive JGB purchases under the current monetary easing programme. The BoJ targets buying JGBs at about JPY 80tn per year, double the JPY 36.9tn of new JGB issuance for funding the FY15 budget. This has raised concerns of a potential liquidity drain. 

If the BoJ maintains its current pace of asset purchases, its JGB holdings will reach 44% of outstanding JGBs by 2016, estimates Standard Chartered. Kuroda said on 16 June that the monetary base-to-GDP ratio is not capped, suggesting that the BoJ remains open to further asset purchases if needed. 

The BoJ published a research report on JGB market liquidity in May, which said that the decline in JGB market liquidity was not significant, and that the execution of JGB transactions and hedging positions would not pose a problem. The report said the liquidity decline could be due to the BoJ's JGB purchases, domestic investors temporarily suspending trading, or Japan's sovereign rating downgrade. The report recommended that the BoJ should closely monitor the market and strengthen market communications, initiatives already taken by the BoJ, notes Standard Chartered.