–Japan’s Central Bank to Phase Out Special Covid Funding Program as Reopening Progresses
–BOJ Sees Economy Picking Up but Warns of Downward Pressure from Commodity Market Rise
By Max Sato
(MaceNews) – The Bank of Japan said Thursday it is maintaining its zero to slightly negative interest rate targets along the yield curve and large asset purchases, as expected, to help the economy recover from the pandemic-caused slump and anchor inflation around its stable 2% target.
The decision on the yield curve control targets was made in an unprecedented unanimous vote versus 8-to-1 votes seen in recent years, as a board member seeking more aggressive easing left the panel in July at the end of his five-year term.
As the drag from the pandemic on small businesses is waning, the BOJ board decided unanimously to phase out the Special Funds-Supplying Operations to Facilitate Financing in Response to Covid-19 and “shift to fund-provisioning that would meet a wide range of financing needs.”
Phasing Out Special Covid Funding Program
The BOJ will extend its fund provisions to lenders that make loans to smaller firms by another six months and finish the program at the end of March 2023. The program had already been extended by six months until the end of September 2022. During the extended period, the bank will provide three-month funds once a month.
The bank will also extend the period of its funding against loans that financial institutions make on the back of government support to mainly support small businesses by three months and complete it at the end of December 2022. It will provide three-month funds once a month during the extended period.
After those operations are finished, the BOJ will continue supporting smaller firms with ample supply of cash in the financial system. To meet a wide range of financing needs, “the bank will set no upper limit on the amount of fund-provisioning under the Funds-Supplying Operations against Pooled Collateral, for which various types of collateral are accepted,” effective Sept. 27.
Easing Policy Stance Maintained
To keep speculative market forces from pushing the long-term bond yield beyond its defense line, the bank also said it will continue offering to buy 10-year Japanese government bonds at a fixed rate of 0.25 percent every business day “unless it is highly likely that no bids will be submitted.” The board decided to introduce this new market operation at its meeting in April.
The bank has been guiding the 10-year JGB yield “around zero” to maximize the impact of monetary easing but it allows market rates to fluctuate between minus 0.25% to plus 0.25%.
The BOJ is keeping its stance of flexibly buying large amounts of Japanese government bonds, which is directly linked to its key policy tool of controlling long-term borrowing costs for businesses and households.
It is also maintaining the pace of its purchases of exchange-traded funds (ETFs) and Japan real estate investment trusts (J-REITs), which have supported domestic stock markets, and thus overall economic sentiment.
Japan’s Economy Picking Up but Price Pressures Remain
The BOJ largely maintained its assessment but noted the reopening of the economy has continued without the government requesting strict public health restrictions, allowing people to dine out and travel more freely. “Japan’s economy has picked up as the resumption of economic activity has progressed while public health has been protected from Covid-19, despite being affected by factors such as a rise in commodities prices,” it said.
“Japan’s economy is likely to recover, with the impact of Covid-19 and supply-side constraints waning, although it is expected to be under downward pressure stemming from a rise in commodities prices due to factors such as the situation surrounding Ukraine,” it said as producer prices remain high and consumer prices are rising faster than expected.
The bank remains optimistic about the positive economic growth mechanism, saying, “Thereafter, as a virtuous cycle from income to spending intensifies gradually, the Japanese economy is projected to continue growing at a pace above its potential growth rate.” The BOJ estimates the rate to be in a range of zero to 0.5%.
Looking ahead, the bank repeated its recent assessment that, “There remain extremely high uncertainties for Japan’s economy” including developments in the pandemic, the Ukraine war and commodities prices.
“In this situation, it is necessary to pay due attention to developments in financial and foreign exchange markets and their impact on Japan’s economic activity and prices,” the bank said as the yen remains weak, exerting upward pressures on already high import costs.
Consumer inflation in Japan surged at a faster pace than expected in August, reflecting elevated producer costs for food, energy and electronic appliances, with both the core and total readings hitting a nearly 31-year high excluding the direct impact of the sales tax hikes in 2014 and 1997, data from the Ministry of Internal Affairs and Communication released Tuesday showed.
The national average core consumer price index (excluding fresh food) rose 2.8% from a year earlier in August. Excluding the direct impact of the sales tax hikes, it is the sharpest gain since the 2.8% rise seen in September 1991.
Many households will see no break in markups in the coming months. All 10 major power companies in Japan have announced sharp hikes in charges in light of rising costs for natural gas and coal. Food and beverage makers also plan to jack up retail prices in October.
The focus is on the bank’s quarterly Outlook Report to be issued after its next meeting on Oct. 27-28, in which the board will update its growth and inflation projections. In July, it projected the core CPI would average 2.4% in fiscal 2022 ending next March before slipping back to 1.4% in fiscal 2023 as the impact of an earlier surge in commodities prices wanes and wage growth is expected to remain slow.
In the July report, the bank maintained its recent outlook that risks to CPI “are skewed to the upside for the time being but generally balanced thereafter.”
Easing Policy Stance Unchanged
At its two-day meeting that ended just before midday Thursday (0300 GMT Friday/2300 EDT Wednesday), the BOJ’s nine-member board decided in a unanimous vote to maintain its current monetary easing stance under the yield curve control framework that it 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 current framework, the BOJ is keeping the 10-year government bond yield, the benchmark for long-term borrowing costs, at around zero percent by buying “a necessary amount” of Japanese government bonds “without setting an upper limit,” and to keep the overnight interest rate at minus 0.1% by charging 0.1% interest on a part of cash reserves parked at the bank by financial institutions.
“For the time being, while closely monitoring the impact of COVID-19, the bank will support financing, mainly of firms, and maintain stability in financial markets, and will not hesitate to take additional easing measures if necessary; it also expects short- and long-term policy interest rates to remain at their present or lower levels,” the bank said, repeating its recent statement.
First Unanimous Vote on Yield Curve Control Targets
The yield curve control framework saw the first unanimous yes vote by the BOJ board on Thursday. Since its inception until the last meeting in July, various members had objected for different reasons.
The five-year term of reflationist board member Goushi Kataoka, who was a private-sector economist, ended on July 23. He had continued dissenting and argued at recent meetings that it was “desirable to further strengthen monetary easing by lowering short-and long-term interest rates, with a view to encouraging firms to make active business fixed investment for the post Covid-19 era.”
Kataoka was replaced by Hajime Takata, a private-sector economist who had warned in the past about the side effects of aggressive monetary easing. The five-year term of Hitoshi Suzuki, formerly a commercial banker, also ended on July 23. He was replaced by Naoki Tamura, who was a senior adviser to Sumitomo Mitsui Banking.
When the yield curve control framework was first adopted on Sept. 21, 2016, it was a 7 to 2 vote. It was voted against by former private-sector economists Takehiro Sato and Takahide Kiuchi (in office from July 2012 to July 2017).
Sato warned that the new framework could have an adverse impact on the functioning of financial intermediation. Kiuchi argued that the short-term rate should be set at plus 0.1% and that the new framework would entail a risk that the BOJ might need to further increase the pace of JGB purchases.
Later, former government economist Yutaka Harada (in office from March 2015 to March 2020) also dissented, saying allowing the long-term yields to move upward and downward to some extent was “too ambiguous” as the guideline for market operations decided by the Policy Board.
On a less contended topic, the BOJ board decided unanimously to leave the main asset purchase guidelines unchanged, as seen in recent meetings.
“The bank will purchase exchange-traded funds (ETFs) and Japan real estate investment trusts (J-REITs) as necessary with upper limits of about 12 trillion yen and about 180 billion yen, respectively, on annual paces of increase in their amounts outstanding,” the BOJ said. It will also purchase CP (commercial paper) and corporate bonds at about the same pace as prior to the pandemic, so that their amounts outstanding will gradually return to pre-pandemic levels, namely, about 2 trillion yen for CP and about 3 trillion yen for corporate bonds.
Contact this reporter: max@macenews.com
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