TOKYO – Japan’s central bank is about to make monetary policy adjustments aimed at increasing its flexibility and making life easier for financial institutions, sources told Nikkei.
During its two-day policy meeting, starting on Thursday, the Bank of Japan will be considering measures that would allow long-term interest rates to move in a slightly larger range of about 0.25%, more or less. less, against 0.2% now. The idea is to keep interest rates low and at the same time stimulate the normal functioning of the market, giving financial institutions the chance to increase revenue.
The bank would also abolish its goal of buying exchange-traded funds, now 6 trillion yen ($ 55 billion) a year, and would instead swear to make those purchases only in times of market turmoil.
With news of BOJ’s intentions spreading on Thursday, the yield on 10-year Japanese government bonds increased to 0.115% at one point, up 0.025% from the previous day. The yen also rose against the dollar, while Japanese bank shares rose.
Although the bank insists that it will continue with large-scale monetary easing to avoid deflation amid the COVID-19 pandemic, its current approach presents some challenges, including reaching the profits of financial institutions and hampering market functions.
The BOJ said at its December meeting that it would conduct a policy review. The conclusions are expected to be released after the end of Friday’s meeting.
The current easing policy is centered on controlling short and long-term interest rates, causing short-term rates to fall by 0.1% and long-term rates to remain stable at 0%. These goals must remain the same.
To manage long-term rates, the BOJ buys government bonds to limit fluctuations in 10-year earnings within a range of about 0.2%. The planned policy change would allow a little more room for maneuver.
As for asset purchases, the bank, in principle, buys around 6 trillion yen, or up to 12 trillion yen, in ETFs per year. The 6 trillion yen target would be cut from its policy, avoiding a situation where the BOJ is compelled to make purchases when prices are high, but allowing it to buy large volumes if prices plummet.
The BOJ has a similar policy of buying 90 billion yen in real estate investment funds annually, in principle, or up to 180 billion yen. That target of 90 billion yen would also be dropped.
Allowing greater flexibility in interest rates would create more opportunities for banks to profit from the purchase and sale of government bonds. In times of economic recovery, long-term rates of more than 10 years generally increase, improving conditions for asset managers, such as insurance companies and pension funds. A BOJ assessment found that even a band as broad as 0.5%, more or less, around the long-term goal would not compromise the effectiveness of its flexibilization policy.
Short-term rates are expected to be kept at the current minus 0.1% and may be further reduced, if necessary – say during the yen’s appreciation periods.
Low interest rates require policies to contain risks, as banks tend to become more cautious about lending. At the same time, despite signs of improvement, the BOJ still expects the economy and commodity prices to take time to recover. The market outlook also remains uncertain, after rising US long-term rates caused the stock to decline.