A call for caution to avoid signaling monetary tightening was raised during the Bank of Japan’s latest policy-setting meeting, a summary of opinions at the session showed Monday.
The call came as the central bank revised its asset-purchasing policy at the Policy Board meeting on March 18 and 19, scrapping the target of annually buying ¥6 trillion in exchange-traded funds (ETFs).
The decision was supported by many BOJ board members as enhancing the sustainability and flexibility of asset purchases by the bank, according to the summary.
At the same time, there was an opinion that “it is necessary to be careful so as to avoid a misunderstanding that the bank has adopted a less accommodative stance on monetary policy.”
In a policy statement issued after the meeting, the BOJ said it would now tolerate the benchmark 10-year government bond yield moving between around plus and minus 0.25% from zero percent.
One opinion described this stance on the bond yield as “desirable since it prevents arbitrageurs and speculators who had lost their profit opportunities from exiting the bond market and helps maintain the price stabilization function in the market.”
Another opinion claimed that amid the lingering impact of the coronavirus pandemic, “it is appropriate for the time being to conduct yield curve control with a priority on stabilizing the entire yield curve at a low level.”
The BOJ also decided at the latest policy meeting to introduce a system to alleviate the side effects on financial institutions from any future BOJ steps to lower interest rates further.
An expectation was expressed that the new system will be “effective in changing the views of market participants who see the possibility of interest rate cuts as limited.”
Another policymaker said achieving the price stability target at the earliest possible time is “the best prescription for containing the side effects of monetary easing,” apparently responding to criticism that the BOJ’s ultraeasy monetary policy has eaten into profit margins of Japanese commercial banks.
Similarly, one policymaker said that with the expectation that the BOJ will continue accommodative measures for a long period, “It is necessary to assess minutely its side effects on the financial system that accumulate over time, as well as with the policy effects.”
Turning to prices, one policymaker said that while Japan’s economy is expected to recover, price developments “are likely to remain weak.”
“Unlike Europe and the United States, there is still a higher risk of deflation than of inflation in Japan,” the policymaker said.
Core consumer prices fell 0.4% in Japan in February from a year earlier, remaining far below the BOJ’s 2% target, due largely to receding electricity prices driven by lower crude oil prices last year.
The summary of opinions is compiled by Gov. Haruhiko Kuroda and does not attribute comments to individual members.
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