TOKYO – Japan’s central bank is ready to make monetary policy adjustments aimed at increasing its flexibility and making life easier for financial institutions, sources told Nikkei.
During its two-day policy meeting starting Thursday, the Bank of Japan will study measures to move long-term interest rates in a slightly larger range of about 0.25%, roughly compared to the current 0.2%. The idea is to keep interest rates low, while encouraging the market to function normally, giving financial institutions the opportunity to increase revenue.
The bank would also abolish its goal of buying publicly traded funds, now 6 trillion yen ($ 55 billion) a year, and instead promised to make those purchases only in times of market turmoil.
As news of the BOJ’s intentions spread on Thursday, the Japanese government’s ten-year bond yield rose to 0.155% at one point, 0.025% more than the day before. The yen also rose against the dollar, while shares of Japanese banks jumped.
While the bank insists it will continue large-scale monetary cuts to prevent deflation amid the COVID-19 pandemic, its current approach has posed some challenges, such as achieving the benefits of financial institutions and hampering the functions of the market.
The BOJ said at the December meeting that it would conduct a policy review. The conclusions are expected to be released after the meeting ends on Friday.
The current flexibility policy focuses on controlling both short-term and long-term interest rates, causing short-term interest rates to fall by 0.1% and long-term interest rates to remain stable at 0%. . These goals must remain the same.
To manage long-term rates, the BOJ buys government bonds to limit fluctuations in yields to ten years within a range of approximately 0.2%. The planned policy change would allow a little more leeway.
In terms of asset purchases, the bank in principle buys about 6 trillion yen, or up to 12 trillion yen, worth ETF a year. The 6 trillion yen target would be reduced from its policy, avoiding a situation where the BOJ is forced to make purchases when prices are high, but allowing it to buy large volumes if prices fall.
The BOJ has a similar policy of buying real estate investment trusts worth 90 billion yen a year, in principle, or up to 180 billion yen. That 90 billion yen target, too, would be dismissed.
Allowing greater interest rate flexibility would create more opportunities for banks to benefit from buying and selling government bonds. In times of economic recovery, long-term rates of more than ten years often rise, improving conditions for asset managers such as insurers and pension funds. A BOJ assessment found that even a band as large as 0.5%, roughly, around the long-term target would not compromise the effectiveness of its relaxation policy.
Short-term rates will remain at least 0.1% current and could be further reduced if necessary, for example, during periods of yen appreciation.
Low interest rates require policies to offset risks, as banks tend to be more cautious about lending. At the same time, despite signs of improvement, the BOJ still expects the economy and commodity prices to take time to recover. Market prospects also remain uncertain, after long-term U.S. rates increased the fall in equities.