BOJ board member proposed looser grip on long-term rates, minutes show

A Bank of Japan board member has proposed allowing long-term interest rates to move more widely, a summary of opinions at a January meeting showed Friday, as the central bank reviews its monetary easing policy tools amid the novel coronavirus pandemic.

At the two-day meeting through Jan. 21, one of the nine board members pointed to heightened risks of deflation in Japan due to a recent resurgence in COVID-19 cases and said it was appropriate to strengthen the bank’s commitment to monetary easing. The pandemic has made the BOJ’s 2% inflation target even more elusive.

“While monetary easing is expected to be prolonged, allowing 10-year Japanese government bond yields to move upward and downward to some extent will meet the investment-management needs of financial institutions through market functioning, and will thereby contribute to financial system stability,” the member said.

The BOJ has adopted a policy known as “yield curve control” to keep interest rates low and stable. It keeps short-term interest rates at minus 0.1% while guiding long-term interest rates around 0%.

There is growing criticism that the approach hurts the profitability of financial institutions, and BOJ Gov. Haruhiko Kuroda said the purpose of the upcoming review of its policy tools in March is to make monetary easing effective and sustainable while minimizing their side effects.

Another BOJ policymaker said the impact of allowing 10-year government bond yields to move more widely will likely be “limited,” as “the proportion of funds that are affected by long-term interest rates is not high among those raised by companies and households.”

Kuroda has said the current framework of monetary easing will be maintained and that fine-tuning will be more likely. The BOJ faces the difficult challenge of making any tweaks without being perceived as moving toward tapering its massive monetary stimulus.

The BOJ has stepped up its buying of assets, including Japanese government bonds and exchange-traded funds, to support the economy and achieve its inflation target.

BOJ watchers say the central bank wants to become more flexible in purchases of assets such as ETFs as the economy is expected to take time to recover from the pandemic and monetary easing will likely be in place for an extended period.

“In terms of yield curve control and purchases of assets such as exchange-traded funds, it is crucial for the bank to conduct them more flexibly in a prioritized manner while maintaining the current policy framework,” one member said.