BOJ Debating How to Keep Policy Sustainable, Reduce Side Effects

(Bloomberg) -- As the clock counts down to the Bank of Japan’s July 31 policy announcement, officials are looking for ways to keep their stimulus program sustainable while reducing the harm it causes in markets and to the profitability of commercial banks.

Recent media reports suggest the gathering could deliver anything from allowing for a more natural rise in long-term interest rates to no change with a mere assurance that policy makers are considering the side effects.

The speculation about policy changes fueled a rise in 10-year Japanese government yields on Monday, before the central bank stepped in with its first fixed-rate buying operation since February, paring the gains.

Bloomberg’s reporting indicates that officials are focused on coming up with adjustments to mitigate harm without doing anything resembling a move to policy normalization. At this stage, there’s little likelihood of a significant change on July 31 to yield-curve control or asset-purchase settings, said officials involved in discussions, who asked not to be identified because the talks are private. Some officials said there’s no fundamental solution to side effects hurting commercial banks.

The dilemma for Governor Haruhiko Kuroda is that even as calls to change policy grow louder, persistently weak inflation dictates the need to maintain stimulus. Winding it back would strengthen the yen, further undermining efforts to spur higher prices, while also hitting Japanese exporters.

The yen gained again on Monday after strengthening by nearly 1 percent on Friday. It was trading at 110.83 at 10:38 a.m. in Tokyo.

Government bonds slumped, with the 10-year yield climbing as much as 6 basis points to 0.09 percent, its highest since February. The BOJ on Monday offered to buy 10-year securities at a fixed rate of 0.11 percent. The benchmark pared its advance after the operation was announced to 0.065 percent.

Kuroda’s Response

Kuroda stuck to his standard playbook on Saturday, declining to comment on the speculation.

“I know absolutely nothing about the basis for those reports,” Kuroda said in Buenos Aires, where he attended the meeting of finance ministers and central bank governors of the world’s leading 20 economies.

It would be inappropriate to make remarks on the subject given the proximity of the BOJ meeting, he said, adding that any policy decision will require sufficient discussion about prices and the state of the economy.

According to a report from Reuters, ideas to mitigate policy harm include tweaking the yield-curve control program to allow for a more natural increase in long-term interest rates, and operational changes to the way the BOJ buys JGBs and exchange-traded funds. The report said discussions were preliminary and outcomes would be dependent on updated inflation forecasts from board members.

Media Reports

The Asahi newspaper said measures including yield-curve control would be debated during the two-day BOJ gathering concluding July 31 but that the board wouldn’t reach any decision on what to do then.

If the bank makes a small adjustment to its monetary-easing program, the yen could advance and stocks in Japan could fall, according to Mitsuo Shimizu, an equity strategist at Aizawa Securities in Tokyo. “But equity market consensus is no change to policy until at least next year, and if it is simply a discussion over side effects from extended easing, then there won’t be a big problem,” he said.

Japan’s latest consumer price data released on Friday showed the core index inching higher to 0.8 percent. That leaves it at less than half the 2 percent target that Kuroda is aiming for. Stripping out both fresh food and energy costs, prices rose only 0.2 percent in June from a year earlier.

Stimulus Program

Key elements of the BOJ’s stimulus program, which hasn’t changed since the adoption of yield-curve control in 2016, include:

• Negative interest rate of minus 0.1 percent charged on some of the money financial institutions keep at the BOJ.
• Yield target of about zero percent for 10-year Japanese government bonds.
• Guideline for the BOJ’s JGB holdings to increase by about 80 trillion yen a year (in reality, it’s dropped well below this).
• Purchasing ETFs so holdings rise by 6 trillion yen a year, and buying Japanese real-estate investment trusts to raise these holdings by 90 billion yen annually.

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