TOKYO – Japan’s central bank is poised to make monetary policy adjustments to increase its flexibility and make life easier for financial institutions, sources told Nikkei.
At its two-day policy meeting starting Thursday, the Bank of Japan will review measures that will allow bond yields to move in a slightly wider band of about 0.25%, plus or minus, from 0.2% now. The idea is to maintain low interest rates while encouraging the market to function normally, giving financial institutions the opportunity to increase their earnings.
The bank would also ditch its target of buying exchange-traded funds, now 6 trillion yen ($ 55 billion) per year, and instead pledge to make such purchases only during times of market turmoil.
As news of the BOJ’s intentions spread Thursday, the yield on 10-year Japanese government bonds rose to 0.115% at one point, up 0.025% from the previous day. The yen also rose against the dollar, while Japanese bank stocks jumped.
While the bank insists it will continue with large-scale monetary easing to avoid deflation during the COVID-19 pandemic, its current approach has presented some challenges, including hitting the profits of financial institutions and hindering market functions.
The BOJ said in its December meeting that it would implement a policy review. The conclusions are expected to be announced after the meeting on Friday.
The current easing policy is aimed at controlling both short and long-term interest rates, reducing short-term interest rates by 0.1% and keeping long-term interest rates stable at 0%. These goals remain the same.
To manage long-term interest rates, the BOJ buys government bonds to limit fluctuations in 10-year interest rates within a range of about plus or minus 0.2%. The envisaged policy change would provide more room for maneuver.
In terms of asset purchases, the bank basically buys about 6 trillion yen, or up to 12 trillion yen, of ETFs per year. The 6 trillion yen target would be dropped from his policy, avoiding a situation where the BOJ is forced to make purchases when prices are high, but allows him to buy large volumes when prices fall.
The BOJ has a similar policy of buying in principle 90 billion yen worth of real estate investment funds annually, or up to 180 billion yen. This 90 billion yen target would also be scrapped.
Allowing more interest rate flexibility would give banks more opportunities to profit from buying and selling government bonds. In times of economic recovery, super long interest rates of more than 10 years often rise, improving conditions for asset managers such as insurers and pension funds. A review by the BOJ found that even a bandwidth of 0.5%, plus or minus, around the long-term target would not jeopardize the effectiveness of its easing policy.
Short-term interest rates should be maintained at the current minus 0.1% and may be lowered further if necessary, for example during periods of appreciation of the yen.
Low interest rates require policies to mitigate risk as banks tend to become more cautious about lending. At the same time, despite signs of improvement, the BOJ still expects it will take time for the economy and commodity prices to recover. The market outlook also remains uncertain after US long-term interest rates skyrocketed and stocks fell.