Business / Financial Markets

BOJ shifts policy framework to target Japan's yield curve

Bloomberg, Kyodo

The Bank of Japan shifted the focus of its monetary stimulus Wednesday away from a rigid target for expanding the supply of money, to controlling the shape of yields across different maturities.

BOJ Gov. Haruhiko Kuroda led his board in keeping the benchmark rate for a share of bank reserves at negative 0.1 percent. The central bank said that the monetary base target, which previously had been set at annual increases of ¥80 trillion, may now fluctuate in the short term as policymakers seek to control the yield curve.

The BOJ scrapped a target for the average maturity of its government bond holdings. Board members also pledged to expand the monetary base until inflation is stable above the 2 percent target — committing to an overshoot of consumer-price gains.

The BOJ has been the most daring of global central banks in using monetary stimulus to confront deflationary pressures and stagnation, but Kuroda recently began to publicly weigh the costs of its extraordinary easing against the benefits, a shift from his “whatever-it-takes” approach of the past three-plus years.

“The BOJ’s decision to steepen the yield curve showed they are taking into account the situation of financial institutions,” said Takeshi Minami, chief economist at Norinchukin Research Institute.

Atsushi Takeda, an economist at Itochu Corp. in Tokyo, said today’s decisions “suggest that the BOJ is reaching its limit to monetary options.”

Skepticism about the odds of success for Abenomics, Prime Minister Shinzo Abe’s economic revival program, may rise if the BOJ is judged to be struggling with the limits of the aggressiveness that marked the first years of Kuroda’s tenure.

Following the BOJ announcement, the yen weakened against the dollar and traded at the ¥102 level early in the afternoon. Meanwhile, Wednesday’s trading at the Tokyo Stock Exchange led gains in Asia, with the benchmark Nikkei average closing at 16,807.62, up 1.9 percent. The Topix index jumped the most this month.

“Overall the BOJ’s stance is positive for bank shares, and this is making it easier for the market overall to rise,” said Ryuta Otsuka, a strategist at Toyo Securities Co. in Tokyo. “If there is a problem it might be the issue over directly meddling with the yield curve. First there’s the issue of whether they’ll succeed, and there’s probably going to be views that say it’s better to leave these things to their natural course.”

Touching on the BOJ’s move not to step deeper into negative interest-rate territory, Sean Darby, Hong Kong-based chief equity strategist at Jefferies Group LLC, said, “The equity market looks at it as being a relief with no further negative deposit rates. But generally the market will take it as there having been monetary tightening because the yield curve has moved up.”

The announcement came after the BOJ concluded its “comprehensive assessment” of the effects of its monetary easing steps it has carried out since Kuroda took office in March 2013.

The central bank said in a statement that the policies it has undertaken for the past three years have improved financial conditions, adding, “Japan’s economy is no longer in deflation.”

But Japan’s core consumer price index, which excludes volatile fresh food prices, fell at the fastest pace in more than three years in July, down 0.5 percent from a year earlier.

The BOJ said Wednesday the major reason behind a downturn in consumer prices is lower crude oil prices, tepid growth in domestic demand following a consumption tax hike in 2014, a slowdown in emerging economies and volatile global financial markets.

At the policy meeting in April 2013, the first under Kuroda after he took office the previous month, the BOJ pledged to attain the 2 percent inflation goal in “about two years.” But it has yet to be accomplished so far.

To turn around the situation, the BOJ earlier this year introduced a negative interest rate of minus 0.1 percent for some reserve funds held by financial institutions at the central bank, after implementing several additional easing steps.

In the wake of the negative interest policy, longer-term interest rates have plunged, with the yield on the 10-year Japanese government bond briefly diving to a record low of minus 0.300 percent in late July.

With the key 10-year yield staying around minus 0.050 percent, many corporate executives have started to argue the BOJ’s negative interest rate policy has eroded the profits of private banks and undermined returns for insurers and pensions.

Fears have been growing that life insurers may lift prices of savings-based products and banks could raise charges on depositors to compensate for their losses, dealing a blow to consumers.

Market participants closely watched what kind of conclusion the BOJ would reach, which is to be followed hours later by the U.S. Federal Reserve announcing its own policy decision. The Fed is widely expected to put off an interest rate hike.

The BOJ decided at the previous meeting through July 29 to almost double its purchases of exchange-traded funds to an annual pace of about ¥6 trillion ($58.5 billion) while leaving unchanged its negative interest rate.

Kuroda then instructed his staff to conduct a “comprehensive assessment” of the effects of the central bank’s monetary easing.