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Letting JGB yield fluctuate makes stimulus impact stronger, not weaker: BOJ deputy Masayoshi Amamiya

Kyodo, JIJI

Bank of Japan Deputy Gov. Masayoshi Amamiya said Thursday the central bank’s monetary policy tweaks earlier this week strengthened the impact of its stimulus measures rather than weaken them.

At a two-day meeting ended Tuesday, the BOJ’s Policy Board voted to maintain its target for the yield on the benchmark 10-year government bond at around zero percent while allowing it to “move upward and downward to some extent,” an acknowledgment that its massive JGB purchases, aimed at keeping the yield at zero, are distorting the market.

“The aim of these policy measures is to strengthen the sustainability of the powerful monetary easing, taking into account the side effects,” Amamiya, who along with Gov. Haruhiko Kuroda voted for the tweaks, said in a speech in Kyoto.

“The bank recognizes that the effects of monetary easing will be strengthened as a whole, in consideration of this sustainability,” he said.

Despite the BOJ’s assurances, the decision has been seen by some as weakening the impact of the radical stimulus because it effectively allows long-term rates to climb higher. By noon Thursday, the JGB’s 10-year yield had risen as high as 0.145 percent, a one-and-a-half year intraday high.

Amamiya also acknowledged the recent decline in JGB trading and the side effects of the BOJ’s radical easing.

“Recently, there is a growing concern in the JGB market that the market functioning has been deteriorating,” he said.

The BOJ “also recognizes the risk that, by continuing such powerful monetary easing, financial institutions’ strength will be cumulatively affected by low profitability, mainly through a decrease in their lending margins,” Amamiya said.

The need to continue stimulus comes from the fact that inflation is running below the BOJ’s 2 percent target, and by its own latest projections will continue to do so through at least fiscal 2020. “We are in a difficult situation . . . as it is taking more time than expected for inflation to rise,” he said.

“Nevertheless, the momentum whereby an improvement in the output gap leads to an increase in actual inflation, and then a rise in inflation expectations, is maintained,” he added, referring to the state where demand for goods and services outpaces supply.

At the meeting, the board also adopted a pledge to keep interest rates at ultralow levels for “an extended period of time,” an apparent bid to reassure the market that the tweaks do not mean the BOJ is following the central banks of the United States and Europe in normalizing policy.

“I would like to reiterate that, even though the projected timing of reaching 2 percent inflation has been delayed, the bank will not reduce the degree of monetary easing,” Amamiya said.