–Concerned About Weakened Bond Market Functions, Board Members Argue for Expanding JGB Yield Trading Range
–Members See JGB Range Adjustment as Not Tightening
–Members Also Discuss Eventual Exit from Easing in Future with No Specifics
By Max Sato
The summary, a preview of the minutes to be issued on Jan. 23, also showed some board members said the adjustment in the trading range should not be regarded as a rate hike. They stressed that maintaining the easing stance is necessary to help firms raise wages and lead the economy onto a sustainable growth path under stable 2 percent inflation.
“Signs of a virtuous cycle have started to be seen, as evidenced by the overall high levels of corporate profits and moves to increase wages amid tight labor market conditions,” one board member said. “However, the price stability target is not considered to have been achieved, and therefore it is appropriate for the bank to maintain monetary easing with respect to the conduct of monetary policy for the time being.”
Another member noted that Japan’s economy is at a crucial juncture as to whether it can achieve a “virtuous cycle” in which higher incomes will lead to demand-based higher prices as opposed to the current cost-push inflation, which has been boosted by global supply constraints and heightened geopolitical risks.
“It is therefore appropriate for the bank to continue with monetary easing and thereby firmly support the economy and realize a favorable environment for firms to raise wages,” the member said.
Members also discussed bond market functions that have been constrained by the BOJ’s policy to artificially keep the interest rates at very low levels, which the bank believes should raise the economy’s growth potential and change people’s deflationary mindset.
“Financial conditions in Japan have been accommodative on the whole,” one member said. “However, the functioning of bond markets has deteriorated, and if this situation persists, it could have a negative impact on financial conditions such as issuance conditions for corporate bonds and hamper the transmission of monetary easing effects.”
Another member also warned, “While stabilizing long-term yields at low levels is necessary in order for Japan’s economy to see sustainable growth, a possible negative impact on market functioning is of concern.” The member concluded that it is therefore “appropriate” for the bank to continue with yield curve control while expanding the range of 10-year Japanese government bond yield fluctuations from the target level.
“The expansion of the range of 10-year JGB yield fluctuations from the target level is not intended to change the direction of monetary easing,” said a different member. “It is a policy measure to make the current monetary easing — which is conducted with the aim of achieving the price stability target of 2% — more sustainable amid global inflation through improvement in the functioning of bond markets.”
At its December meeting, the BOJ’s policy board decided unanimously to allow the yield on the 10-year Japanese government bonds to rise to 0.5% from the current cap of 0.25% amid upward pressures arising from aggressive tightening by other major central banks, hoping to revive some of the paralyzed market functions under its yield curve control regime.
At the same time, the board voted unanimously to maintain its basic monetary easing stance, keeping its zero to slightly negative interest rate targets along the yield curve and large asset purchases in order to support economic recovery from the pandemic-triggered slump and anchor inflation around its 2% price stability target.
“Thereafter, it is projected to accelerate again moderately on the back of improvement in the output gap and rises in medium- to long-term inflation expectations and in wage growth,” it in its policy statement issued on Dec. 20
Looking ahead, members referred to an eventual exit from the bank’s highly accommodative policy stance that has been in place for nearly a decade but the summary provided no specifics, according to the summary released Wednesday.
One member said that in the phase of an exit from the current monetary policy, “it will be necessary to examine where the risks associated with a rise in
interest rates lie and whether market participants are well prepared.”
“Although it is appropriate to continue with monetary easing at this point, it is necessary to examine this at some point in future and assess the balance between positive effects and side effects,” another one said.
There was also an opinion that it would be premature to review the current 2% inflation target and the easing framework that that bank has maintained for the purpose of allowing inflation to overshoot and anchoring it around 2%.
“There has been an argument that the price stability target of 2 percent needs to be reviewed and examined, including the validity of the numerical target value,” a member said. “However, revision of that value is not appropriate since it could make the target ambiguous and the monetary policy response inadequate.”