The Bank of Japan’s policy review will likely center on flexible stock-fund buying, bond yield movements and the potency of negative rates as the central bank looks for ways to make tools designed for a shorter time span function more effectively over the long haul.

Gov. Haruhiko Kuroda has repeatedly said in a flurry of appearances in parliament, including sessions on Wednesday, that the central bank is seeking to make its yield curve control framework more effective by fine tuning it rather than overhauling it at its March 18-19 meeting.

Still, the undertaking of a review suggests more than superficial tweaks are in the pipeline as the BOJ looks for a further evolution of its approach.

Even if recovering energy prices help turn Japan’s inflation positive again this year, Kuroda doesn’t see stable 2% price growth returning before his current term ends in April 2023. Hence the need to make the mechanics of BOJ policy more effective and to deal with some of the negative side effects of its whale-like presence in bond and stock markets.

A decade of buying exchange-traded funds has turned the central bank into the biggest holder of domestic stocks.

With the Nikkei stock index around three-decade highs, some lawmakers and economists are asking why it’s necessary to keep propping up the market.

The BOJ’s purchases could also be crowding out private investors in the ETF market, complicating an eventual exit from stimulus and constraining efforts to improve corporate governance at companies where the central bank holds a lot of shares. The BOJ indirectly owns more than 5% of shares at 485 Japanese companies, according to estimates by NLI Research Institute.

The need to recalibrate the ETF buying is the biggest motive for holding the review, according to Kazuo Momma, a former BOJ official in charge of monetary policy.

​The BOJ is widely expected to hint that it won’t buy when stocks are high, a stance it has already signaled with fewer forays into the market this year.

With bond yields hitting the highest level in more than two years, bond traders are scrutinizing all operations by the central bank to control the yield curve.

Kuroda has already said he won’t change the two main anchoring points: the short-term negative interest rate and the 10-year bond yield target.

The last major policy review in 2016 helped the BOJ dig the yield curve from alarmingly low levels and economize on its bond buying through yield curve control. But as time drags on, some investors feel the curve is now too flat and that the bank has kept the curve too low and stable during the pandemic.

Loosening the strait jacket around the 10 year target of zero could help push up super-long yields while offering more potential volatility for bond traders to profit from. The bank has said excessively low super-long yields aren’t desirable for life insurers and pension funds.

As a holder of 45% of Japan’s government bonds, the BOJ is well aware of its outsized footprint in the market.

The BOJ doubled its acceptable movement range of long-term yields to around 20 basis points either side of zero in July 2018. Some analysts and investors expect a further widening at the review as it would help the bank further reduce its reliance on buying JGBs while allowing bond trading to function a little more like a regular market.

Still, some economists doubt a range widening is a slam dunk decision, since it would contradict Kuroda’s pledge to keep the entire yield curve low during the pandemic and could put upward pressure on the yen.

The central bank has been unable to budge its short-term interest rate since pushing it below zero in January 2016.

As the negative interest rate squeezes the profits of struggling regional banks, there’s a widespread view that the BOJ can’t lower it. The BOJ likely wants to change that perception and restore it as a live option, Momma said.

One way it might be able to do that is to hint or say it will increase the amount of reserves at the BOJ earning 0.1% interest in the BOJ’s three-tier reserve system should it lower the rate on the much thinner policy tier.

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