–Central Bank Adds New Schemes For “Flexible, Nimble” Policy Response
–BOJ To Maintain Basic Yield Curve Control Framework
By Max Sato
(MaceNews) – The Bank of Japan on Friday decided to add new tools and tweaked existing schemes to make its monetary easing response “more flexible and nimble” in its prolonged battle to guide inflation toward its 2% target from around zero.
The move is intended to save ammunition during “normal times” and quickly unleash easing weapons in a crisis, as outlined by BOJ Deputy Governor Masayoshi Amamiya in a speech earlier this month.
At its two-day meeting that ended on Friday afternoon, the nine-member BOJ board decided to introduce new programs after reviewing its policy tools in the past two months.
–Incentive Scheme To Promote Lending
First, the BOJ will establish an incentive program called the “Interest Scheme to Promote Lending,” which is designed to allow the BOJ to cut both short-term interest rates (currently minus 0.1%) and long-term rates (around zero percent) “nimbly,” without hurting the functioning of financial intermediation further.
In the new scheme, interest rates will be linked to the short-term policy interest rate and applied to a certain amount of the reserves deposited by financial institutions at the central bank.
In the first category, the BOJ plans to 0.2% interest on financial institutions’ current account balances in special operations in response to COVID-19, when funds are provided against loans made by financial institutions on their own.
In the second category, the bank will pay 0.1% on lenders’ current account balances in special pandemic operations, in which funds are provided against loans other than those in the first category and against private debt pledged as collateral.
In the third category, the interest is zero on the account balances in the regular loan support program and the operation aims to support lenders in disaster areas.
–Clear, Wider 10-Year Yield Range
The second item adopted after the policy review is a more flexible management of yield curve control during “normal times.”
The BOJ will now make it clear that it is allowing the 10-year yield on Japanese government bonds to fluctuate 25 basis points (0.25 percentage point) either side of the target level, which is currently around zero percent. Previously, it was believed that the bank was allowing moves of plus or minus 20 basis points around the target.
This means the BOJ may not conduct JGB buying operations when the 10-year yield deviates from the target in an orderly manner.
As part of the second item on the new menu, the bank is introducing “fixed-rate purchase operations for consecutive days,” which it hopes to be a powerful tool to counter a spike in the long-term yield.
–Large ETF, J-REIT Buying To Continue
In the third item, the BOJ will continue increasing its outstanding holdings of exchange-traded funds (ETFs) and Japan real estate investment trusts (J-REITs) “as necessary” up to Y12 trillion and Y180 billion, respectively.
These high upper limits were adopted during the pandemic as a temporary measure, but the BOJ decided to keep them permanently, “even after COVID-19 subsides.”
The bank has been supporting investor sentiment by buying ETFs in a down market, which it believes should lead to a more positive mindset toward higher prices among households and businesses. But it has been criticized for dominating the stock market and distorting normal price discovery.
The bank has been supporting investor sentiment by buying ETFs in a down market, which it believes should lead to a more positive mindset toward higher prices among households and businesses. But it has been criticized for dominating the stock market and distorting normal price discovery.
To allow more flexible asset holdings and pave the way for an eventual unwinding of its huge assets, the BOJ removed the reference to its basic guideline for purchases of ETFs and J-REITs from its policy statement. Previously it had stated that the bank “will purchase these assets so that their amounts outstanding will increase at annual paces of about 6 trillion yen and about 90 billion yen, respectively.”
In Friday’s statement, the bank also said it would only purchase ETFs tracking the Tokyo Stock Price Index (TOPIX), which is an index with the largest number of component stocks.
–Basic Easing Framework Unchanged
The BOJ board decided in an 8-to-1 vote to maintain its current monetary easing guideline under the yield curve control framework adopted in September 2016, vowing to keep zero to negative interest rates as long as necessary to achieve its 2% inflation target in a stable manner.
Under the framework, the BOJ has been trying to stabilize the 10-year government bond yield, the benchmark for long-term borrowing costs, at around zero percent through large-scale purchases of Japanese government bonds without setting an upper limit.
It has also been guiding the overnight interest rate at -0.1% by charging 0.1% interest on a part of cash reserves parked at the bank by financial institutions, which is aimed at encouraging banks to lend more and invest in growth areas.
The BOJ will purchase commercial paper and corporate bonds with an upper limit on the amount outstanding of about Y20 trillion in total until the end of September 2021 as part of measures to mitigate the impact of the pandemic.
As expected, reflationist board member Goushi Kataoka, a former private-sector economist, continued dissenting at the latest meeting, arguing that it was “desirable to further strengthen monetary easing by lowering short-and long-term interest rates,” according to the BOJ.
“For the time being, the bank will closely monitor the impact of COVID-19 and will not hesitate to take additional easing measures if necessary, and also it expects short-and long-term policy interest rates to remain at their present or lower levels,” the bank said, repeating its previous statements.