TOKYO – The central bank in Japan is ready to implement monetary policy adjustments to increase its flexibility and make life easier for financial institutions, sources told Nikkei.
During its two-day policy meeting on Thursday, the Bank of Japan will look at measures that could move long-term interest rates to a slightly greater extent of around 0.25%, plus or minus, compared to 0.2%. The idea is to maintain low interest rates while encouraging the market to function normally, giving financial institutions the opportunity to increase revenue.
The bank would also abolish its target for buying exchange-traded funds, now 6 trillion yen ($ 55 billion) a year, and instead promise to make such purchases only in times of market turmoil.
As news of the BOJ’s intentions spread on Thursday, yields on ten-year Japanese government bonds rose to 0.115% at one point, up 0.025% from the previous day. The yen also rose against the dollar, while Japanese bank shares jumped.
Although the bank insists it will continue with large-scale monetary easing to prevent deflation amid the COVID-19 pandemic, the current approach has posed some challenges, including the profitability of financial institutions and the impediment of market functions.
The BOJ said at its December meeting that it would conduct a policy review. The conclusions are expected to be announced Friday after the meeting.
The current relief policy is aimed at controlling short- and long-term interest rates, which results in short-term rates falling by 0.1% and holding long-term stability at 0%. These targets should remain the same.
To manage long-term rates, the BOJ buys government bonds to curb fluctuations in ten-year yields within a band of about plus or minus 0.2%. The proposed policy change will allow for a little more leeway.
In terms of asset purchases, the bank in principle buys about 6 trillion yen, or up to 12 trillion yen, ETFs a year. The target of 6 trillion yen will be cut off from its policy, and it will avoid the situation where the BOJ is forced to make purchases when prices are high, but it allows it to buy large volumes when prices fall.
The BOJ has a similar policy of buying up to 90 billion yen from investment funds annually, in principle, or up to 180 billion yen. This target of 90 billion yen will also be scrapped.
By enabling greater flexibility in interest rates, banks will create more opportunities to take advantage of 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 review by the BOJ found that even a band as wide as 0.5%, plus or minus, around the long-term target would not jeopardize the effectiveness of its relief policy.
Short-term rates must be maintained at the current minus 0.1% and can be lowered further if necessary – say during periods of yen appreciation.
Low interest rates require policies to counteract the risks, as banks tend to be more cautious with loans. At the same time, despite signs of improvement, the BOJ still expects the economy and the price of goods to take time to recover. The market outlook also remains uncertain, after US long-term rates sent equities down.