–BOJ Board Keeps Basic Easing Stance Unanimously After Allowing Greater Flexibility in July
By Max Sato
(MaceNews) – The Bank of Japan said Friday its policy board decided unanimously to maintain its monetary easing stance, keeping its zero to slightly negative interest rate targets along the yield curve as well as large asset purchases to continue seeking stable 2% inflation and support sustainable wage growth.
At its previous meeting in July, the board decided in an eight to one vote to make the bank’s existing reference range for the 10-year bond yield more flexible, basically keeping the range of minus 0.5% to plus 0.5%, but expanded its ultimate defense lines to minus 1.0% and plus 1.0% in market operations. The July vote on the overall easing stance was unanimous.
The bank repeated its July decision that it will offer to buy 10-year Japanese government bonds at 1.0% every business day through fixed rate purchase operations unless it is highly likely that no bids will be submitted. Previously, the bank was offering to buy long-term bonds at a fixed rate of 0.5%.
By providing “greater flexibility” to its market operations, the bank hopes to avoid being forced to abandon the yield curve control policy framework when long-term interest rates come under persistent upward pressures. It also hopes to allow a natural uptick in long-term interest rates that reflects economic recovery with substantial wage hikes and mitigate the negative impact of artificially suppressing interest rates, which has paralyzed bond market functions and could negatively affect other financial markets.
Patiently Pursuing Stable 2% Inflation with Monetary Easing
The bank continues to justify its accommodative monetary policy stance.
“With extremely high uncertainties surrounding economies and financial markets at home and abroad, the bank will patiently continue with monetary easing while nimbly responding to developments in economic activity and prices as well as financial conditions,” it said. “By doing so, it will aim to achieve the price stability target of 2% in a sustainable and stable manner, accompanied by wage increases.”
This statement was first issued in April and has been repeated at every meeting since then. It indicates that the bank could adjust its yield curve control framework to allow slightly higher interest rates in a gradual shift toward an eventual exit from a decade of large-scale monetary easing.
In April, the bank said the board would spend the next 12 to 18 months, conducting a “broad-perspective review” of the costs and benefits of the bank’s various monetary easing measures implemented in the past 25 years. Achieving price stability “has been a challenge” since late 1990s when Japan plunged into deflation, it said in April.
Governor Kazuo Ueda, who took office on April 9, has said it is likely to take some time before the 2% inflation target is achieved and that the cost of letting inflation exceed the target is not so large as the cost of tightening too early.
But he has also said the bank’s policymakers may have enough data by the end of the year to judge whether it would be appropriate to lift the overnight lending rate target from minus 0.1%.
BOJ See Modest Economic Recovery, ‘Extremely High Uncertainties’
“Japan’s economy is likely to continue recovering moderately for the time beingsupported by factors such as the materialization of pent-up demand, although it is expected to be under downward pressure stemming from a slowdown in the pace of recovery in overseas economies,” the bank said, repeating its assessment in the quarterly Outlook Report for July.
Looking ahead, the bank also repeated its recent assessment that “there are extremely high uncertainties” surrounding Japan’s economy including developments in overseas economic activities and prices, commodity prices as well as domestic firms’ wage- and price-setting behavior.
“Under these circumstances, 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 BOJ said. The yen remains relatively weak as the U.S. Federal Reserve has been fighting inflation with rate hikes while the BOJ has maintained monetary easing.
Basic Easing Policy Stance in Place
At its two-day meeting that ended just before 1200 JST Friday (0300 GMT Friday/2300 EDT Thursday), the BOJ’s nine-member board decided in a unanimous vote to maintain its overall 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.
The bank also confirmed its overshooting commitment, saying, “It will continue expanding the monetary base until the year-on-year rate of increase in the observed consumer price index (CPI, all items less fresh food) exceeds 2% and stays above the target in a stable manner.”
“The bank will continue to maintain stability of financing, mainly of firms, and financial markets, and will not hesitate to take additional easing measures if necessary,” it concluded.
No Change to ETF, J-REIT Purchases
The BOJ board decided unanimously to leave the main asset purchase guidelines unchanged. Its dominant presence in the domestic stock markets has supported overall sentiment.
“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.
The bank will maintain the amount of outstanding of CP (commercial paper) at about 2 million yen. It will purchase corporate bonds at about the same pace as prior to the pandemic, so that their amounts outstanding will gradually return to pre-pandemic levels of about 3 trillion yen. “In adjusting the amount outstanding of corporate bonds, the bank will give due consideration to their issuance conditions,” it said, repeating its latest stance.