The Bank of Japan carved out more flexibility for its stimulus tools following a review to shore up its policy framework for a long-haul fight to stoke inflation.
The bank set out a wider-than-previously-thought movement range for bond yields, scrapped a buying target for stock funds and said it would offer lending incentives if it cuts rates at the end of a policy review.
While the currency and bond markets largely took the moves in stride, the BOJ’s decision to focus only on exchange-traded funds on the Topix index drove down shares on the 225-issue Nikkei average.
With Friday’s policy tweaks, BOJ Gov. Haruhiko Kuroda tried to balance the need to build more support for his stimulus over the longer term while avoiding the impression that he’s backpedaling on his easing measures.
His job hasn’t been made any easier by global peers that have kept the pedal on stimulus. The European Central Bank last week made clear it plans to buy more bonds and the U.S. Federal Reserve on Wednesday projected near-zero rates at least through 2023, despite improved forecasts for inflation, employment and growth.
“The BOJ is trying hard to strike a balance on very tight rope between side effects and the need to continue easing,” said Tetsufumi Yamakawa, head of Japan economic research at Barclays PLC and a former BOJ official. “Even though its easing commitment is clear, by trying to reduce the side effects of stimulus, the BOJ clearly differs from the Fed and the ECB.”
While leaving its main policy rates unchanged, the bank said the band around its 10-year bond yield target was around 0.25% either side of zero, according to a statement Friday. Until now the range had been assumed to be around 0.2% based on comments from Kuroda.
The move is likely aimed at generating more movement in Japan’s low volatility bond market as the BOJ tries to address some of the adverse effects of its stimulus and stem criticism of its policies.
The BOJ also ditched its ¥6 trillion guide for annual purchases of exchange-traded funds, while sticking with an upper limit of ¥12 trillion so it can still step into the market if sentiment takes a turn for the worse.
The bank also said it would offer lending incentives if it lowered its target rates. The move is aimed at changing the perception it cannot lower its negative rate due to the impact it would have on struggling regional banks.
The BOJ’s scope for ultimately eking out Friday’s changes owes much to a recent weakening of the yen, as recent jumps in U.S. Treasury yields far outran those in Japan, where they are held down by the central bank. The wider difference in rates contributed to the yen reaching the ¥109 mark against the dollar compared with a much stronger ¥102.7 at the start of the year.
A weaker yen helps boost the profits of Japan’s exporters while generating some upward pressure on prices via more expensive imports. The growing rate difference also supports Kuroda’s claim that the BOJ’s yield curve control approach can still provide powerful stimulus and only needs a touch more flexibility rather than an overhaul.
“The BOJ couldn’t really hope for much better timing,” said Yuichi Kodama, chief economist at Meiji Yasuda Research Institute ahead of Friday’s decision. “The yen isn’t gonna break through the symbolic 100 mark against the dollar, even if the result of the review is seen as backtracking from stimulus.”
While the pandemic unleashed a huge wave of central bank and government support for economies, businesses and households, it caught the BOJ already at full stretch after years of stimulus to ignite price growth. The pile of assets accumulated by the BOJ in its inflation fight was already bigger than the world’s third-largest economy when COVID-19 struck.
The urgency for the BOJ to create extra breathing space to run stimulus for longer became more apparent at the end of last year as prices fell at the fastest pace in a decade and the bank became the largest holder of Japanese stocks as well as bonds. Extra flexibility created now could also make an eventual tilt toward the exit door from easy money a fraction easier.
That still looks a long way off. A report earlier Friday showed prices fell for a seventh consecutive month in February, albeit at a slower pace, underscoring the likelihood that the BOJ is locked into a long fight against weak inflation. Kuroda himself has said he doesn’t expect price growth to hit a stable 2% before 2024 in contrast to concerns of overheating prices emerging elsewhere in the world.
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