By Leika Kihara
TOKYO (Reuters) -The Bank of Japan will likely offer numerical guidance on how much government bonds it will buy upon ending negative interest rates and yield curve control (YCC), to avoid causing market disruptions, said four sources familiar with its thinking.
With inflation exceeding the BOJ's 2% inflation target for well over a year, many market players expect the central bank to pull short-term interest rates out of negative territory either next week or in April.
Upon ending negative rates, the BOJ is also likely to ditch yield curve control (YCC) - a policy that guides the 10-year bond yield around 0% with a loose cap of 1%, the sources said.
While such a step would allow market forces to play a bigger role in bond price moves, the BOJ will likely provide guidance on the pace of bond buying to prevent long-term interest rates from rising too much, the sources said.
"The BOJ would have to keep buying government bonds to some extent, and present some form of guidance to avoid any abrupt spike in yields," one of the sources said, a view echoed by another source.
"The BOJ will likely use bond buying as a backstop against unwelcome spike in yields," another source said, adding that setting a loose quantitative guidance would be among options.
Currently, the BOJ does not set an explicit target on the amount of bond purchases. But it buys roughly 6 trillion yen ($40.7 billion) worth of government bonds per month to achieve its yield target.
The central bank is likely to roughly maintain the current pace of bond buying after ditching YCC, and forgo sharp cuts in the amount for the time being, the sources said.
As part of efforts to reflate growth and fire up inflation to its 2% target, the BOJ deployed a massive asset-buying programme in 2013 under former Governor Haruhiko Kuroda.
As the inflation target proved elusive, the BOJ began applying in 2016 a 0.1% charge on financial institutions' excess reserves under its negative rate policy. It also adopted YCC in September of that year.
Upon ending negative rates, the BOJ will likely set the overnight call rate as its new policy target. By paying 0.1% interest on reserves parked with the central bank, the BOJ will guide the overnight call rate around zero, the sources said.
With a near-term exit from negative rates seen as a done deal, market attention is shifting toward any clues the BOJ may give on the pace of subsequent interest rate hikes.
But the BOJ is likely to forgo offering explicit guidance on how soon it will hike rates again due to uncertainties over the economic outlook, the sources said.
BOJ Governor Kazuo Ueda has said the central bank will maintain accommodative monetary conditions even after ending negative rates, and avoid causing any "discontinuity" from the current ultra-loose policy.
Any guidance on the future policy path will likely be in line with such comments, the sources said.
As for the BOJ's risky asset buying, Deputy Governor Shinichi Uchida said in February that it was natural for the purchases to be discontinued when conditions fall in place to phase out the bank's massive stimulus programme.
($1 = 147.3000 yen)