TOKYO – Japan’s central bank is ready to make monetary policy adjustments designed to increase its flexibility and make life easier for financial institutions, sources told Nikkei.
At its two-day policy meeting on Thursday, the Bank of Japan will consider measures to allow long-term interest rates to move in a slightly higher range of about 0.25%, plus or minus, from 0.2 % now. The idea is to keep interest rates low, while encouraging the market to function normally, giving financial institutions a chance to increase revenue.
The bank would also abolish its target of acquiring exchange-traded funds, now at 6 trillion yen ($ 55 billion) a year, and would promise to make such acquisitions only in times of market crisis.
As news of the BOJ’s intentions spread on Thursday, the yield on Japan’s 10-year government bonds rose to 0.155% at one point, up 0.025% from the previous day. The yen also rose against the dollar, while Japanese bank shares rose.
Although the bank insists it will continue a large-scale monetary cut to prevent deflation amid the COVID-19 pandemic, its current approach has raised some challenges, including reaching the profits of financial institutions and hampering market functions.
The BOJ said at its December meeting that it would conduct a policy review. The conclusions are expected to be revealed after the end of Friday’s meeting.
The current relaxation 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 at 0%. These targets must remain the same.
To manage long-term rates, the BOJ buys government bonds to limit 10-year yield fluctuations in a range of about plus or minus 0.2%. The planned policy change would allow a little more space.
In terms of asset acquisitions, the bank basically buys about 6 trillion yen, or up to 12 trillion yen, worth of ETFs a year. The 6 trillion yen target would be removed 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. And this 90 billion yen target would be canceled.
Allowing greater interest rate flexibility would create more opportunities for banks to take advantage of buying and selling government bonds. During periods of economic recovery, long-term rates of more than 10 years often increase, improving conditions for asset managers such as insurers and pension funds. An assessment by the BOJ found that not even a band of up to 0.5%, plus or minus, around the long-term target would compromise the effectiveness of its relaxation policy.
Short-term rates need to be kept below the current 0.1% and could be further reduced if necessary – say, during periods of appreciation of the yen.
Low interest rates require policies to counteract 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 have time to recover. Market prospects also remain uncertain, after long-term US rates caused stocks to fall.