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September 22, 2016

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BOJ overhauls its policy in fresh inflation push

THE Bank of Japan made an abrupt shift yesterday to targeting interest rates on government bonds to achieve its elusive inflation target, after years of massive money printing failed to jolt the economy out of decades-long stagnation.

While the BOJ reassured markets it would continue to buy large amounts of bonds and riskier assets, the policy reboot appeared to open the door for an eventual winding down of its huge asset purchases, and tried to repair some of the damage caused by its shock move to negative rates early this year.

“The impression is that the BOJ is starting to pull back some of its troops from the battlefront,” said Katsutoshi Inadome, senior fixed-income strategist at Mitsubishi UFJ Morgan Stanley Securities.

The BOJ’s increasingly radical stimulus efforts are being closely watched by other global central banks which are also struggling to revive growth, such as the European Central Bank. Many investors fear central banks have nearly exhausted the limits of what monetary policy can do, putting pressure back on governments to step up spending.

In setting rate targets for financial institutions’ excess cash deposits and 10-year government bonds, the BOJ looked set to exert unprecedented control over bond market rates to try to spark life into the world’s third-largest economy.

Japanese stocks rose nearly 2 percent after the move, which could ease profit pressure on banks and insurers from ultra-low interest rates, though analysts doubted the impact would trickle down much into the broader economy.

In a bid to reassure nervous markets, the BOJ maintained its 0.1 percent negative rate and said it would continue buying government bonds at the current pace for the time being.

But it dropped its explicit target of increasing base money, the amount of money it prints, by an annual 80 trillion yen (US$788 billion), in what some analysts said was a tacit admission its aggressive asset-buying was becoming unsustainable.

Under its new framework, the BOJ will buy long-term government bonds as necessary to keep 10-year bond yields at current levels of around zero percent.

If it succeeds, economists believe that would open the door to scaling back its bond purchases, but still leave it the option to buy more bonds or cut rates deeper into negative territory if economic conditions deteriorate.

The BOJ says that by directly targeting short and long-term rates, it can more efficiently reduce borrowing costs while allowing for a rise in super-long yields, which would help firms like insurers give pensioners better investment returns.

“Central banks have already been taking steps to directly influence long-term rates (via bond purchases). The BOJ has done so too and clearly has been successful,” Governor Haruhiko Kuroda told a news conference.

The BOJ also left open the possibility that it will maintain its ultra-loose policy longer than expected, saying it would allow inflation to overshoot its 2 percent target before tapering asset purchases.

But that seemed at odds with both the overhaul of policy focus and the fact that the core consumer prices fell an annual 0.5 percent in July, the weakest reading since before the BOJ launched its stimulus program in 2013.


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