By Max Sato
–Board Members Also Note Side-Effects of Easing on Market Functioning
–Summary Shows No Specific Debate on How BOJ Should Prepare for Eventual Exit
(MaceNews) – Bank of Japan board members agreed that large-scale monetary easing should continue to support structural reforms toward sustained wage growth as the bank inches closer to achieving its 2% price stability target, according to the summary of opinions expressed at the bank’s March 9-10 meeting released Monday.
The summary also showed board members were mindful of the distorted functioning of financial markets after a decade of massive cash injections in the system aimed at reflating the economy from 15 years of deflation. Some mentioned the need to review the policy in the future but there was no specific debate on how the bank should prepare for an eventual exit from super-low interest rates and large purchases of financial assets.
“As the current monetary easing has had side effects, such as distortions on the yield curve, it is necessary for the bank to examine market functioning without any preconceptions while assessing the balance between positive effects and side effects,” one member said. “That said, in the current phase, the bank should persistently continue with large-scale monetary easing.”
There was a cautiously optimistic view on the issue: “It will still take time to examine the effects that the modification of the conduct of yield curve control has on market functioning. Nevertheless, when the observed CPI inflation declines and market projections of interest rates in turn calm down, distortions on the yield curve are expected to be corrected.”
Under the yield curve control framework adopted in September 2016, the BOJ has been 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.
Many measures have been taken since the December, and while they have been effective to a certain extent, fundamental improvement in market functioning has not yet been realized, another member said.
“It is necessary to monitor humbly and carefully the situation going forward — namely, market conditions as well as developments in economic activity, prices, and wages — and ensure the transmission of the effects of monetary easing to the real economy in a sustainable and effective manner by, if necessary, working to improve market functioning, including the functioning of the corporate bond and swap markets,” the same member said.
At least one member said the risk of under-easing is greater than over-easing when it comes to guiding inflation toward stable 2% with sustained wage growth, noting that in view of recent price rises, there are calls for revision to the bank’s accommodative monetary policy.”
“However, as the environment surrounding prices is currently changing for the better toward achieving the price stability target, the risk from a hasty policy change that could lead to missing a chance of such achievement should be considered as more significant than the risk from a delay in policy change,” the member said.
It is important for Japan’s economy that its economic and wage structures are reformed so that wages increase in tandem with economic growth, one member said, echoing recent official remarks.
The member continued, “If the bank lowers its inflation target and changes its accommodative monetary policy given that it is taking time to achieve the target, there is a risk that necessary reforms will be delayed.”
“In order for progress to be made in supply-side reforms that are necessary for sustained wage increases and the expectation of a virtuous cycle to turn into conviction, the bank needs to persistently continue with monetary easing and support firms’ efforts to make those reforms,” another member said.
At its March meeting, the bank’s policy board decided unanimously to maintain its monetary easing stance, keeping its zero to slightly negative interest rate targets along the yield curve and large asset purchases to support gradual economic recovery and guide inflation toward stable 2%.
It was the last scheduled one for Governor Haruhiko Kuroda, who has led the bank’s ‘unprecedented’ large-scale monetary easing campaign for nearly 10 years based on the central bank’s policy coordination agreement with the government as part of a reflationary Abenomics policy mix of aggressive monetary easing, flexible fiscal spending and growth strategies.
The bank’s board unanimously maintained its latest decision made in December to allow the yield on the 10-year Japanese government bonds to rise to 0.5% from the previous cap of 0.25% amid upward pressures arising from last year’s aggressive tightening by other major central banks, hoping to revive some of the paralyzed market functions under its yield curve control regime.
Contact this reporter: max@macenews.com
Content may appear first or exclusively on the Mace News premium service. For real-time delivery in entirety contact tony@macenews.com. Twitter headlines @macenewsmacro.