By Noriyuki Suzuki,
A set of tweaks by the Bank of Japan designed to make monetary easing effective and sustainable could be a harbinger of a measured, longer-term shift toward tapering, analysts say.
After a much-hyped review of its tool kit, designed to strike a balance between the benefits and side-effects of prolonged loose monetary policy, the BOJ explicitly said Friday it will allow long-term interest rates to fluctuate in a wider band. The bank also removed a 6 trillion yen ($55 billion) annual target for buying exchange-traded funds while maintaining a ceiling of 12 trillion yen.
These changes are interpreted as a natural course of events and analysts say financial markets will likely take them in stride. The BOJ has faced growing criticism of its huge presence in both bond and stock markets under the name of supporting the economy and accelerating inflation toward its elusive 2 percent target.
Still, only hours after the BOJ announced the findings of the review at a two-day policy meeting, Governor Haruhiko Kuroda made comments that appear confusing to market players: the bank is not widening the band for long-term interest rates and it will not trim ETF buying.
"I don't take Mr. Kuroda's remarks at face value," said Hideo Kumano, chief economist at Dai-ichi Life Research Institute. "The findings of the review reflect that the BOJ is struggling."
"Mr. Kuroda said the BOJ is not moving up the ceiling on long-term rates but it remains to be seen whether that will be the case during day-to-day operations from now," Kumano added.
The program called "yield curve control" has been in place since 2016 to keep short-term interest rates at minus 0.1 percent while guiding 10-year Japanese government bond yields around zero percent. After the review, the BOJ said the yields can move up or down about 0.25 percentage point from zero, slightly wider than 0.2 percent either side previously.
Kuroda, along with deputy chief Masayoshi Amamiya, is of the view that interest rates should be low as the pandemic drags on. But Kuroda said fluctuations within that range will not hurt the effects of the central bank's easing policy.
"Though it's not by a big margin, the BOJ is allowing long-term rates to rise and it does not want to shock the market," Kumano said. "Globally, bond yields are expected to trend higher."
Analysts say keeping short-term rates low is effective in supporting the economy. For financial institutions, the yield curve control program hurts their profitability and reduces the appeal of trade as yields move only in a boxed range.
Aggressive buying of Japanese government bonds and ETFs has expanded the BOJ's balance sheet. It now owns roughly 45 percent of all outstanding debt issued by the Japanese government and is a top shareholder of Japanese stocks.
"Personally, I was expecting much bigger changes. In terms of ETF buying, the 6 trillion yen quota is removed and the stage has been set for the BOJ to reduce buying," said Yuichi Kodama, chief economist at Meiji Yasuda Research Institute.
The pandemic prompted the BOJ to increase ETF purchases, setting the ceiling on 12 trillion yen a year. But the BOJ has already trimmed its buying prior to the review, with economic recovery hopes supporting global stock markets.
In that sense, the removal of the target came as expected for some market participants.
"It's more of a relief because we didn't see big surprises," said Seiichi Suzuki, chief equity market analyst at Tokai Tokyo Research Institute. "The BOJ is slightly changing how it will purchase ETFs, not ending its program."
The BOJ may have secured some wiggle room to maneuver amid market perceptions that it is running out of ammunition to ease further. Years of bold monetary easing have not produced the intended result to fire up inflation toward a 2 percent goal.
The core consumer price index, excluding volatile fresh foods, will likely drop 0.5 percent in fiscal 2020 ending this month and rise only 0.5 percent in fiscal 2021, according to the latest BOJ projections.
Despite holding onto the 2 percent inflation target, the BOJ does not need to "pretend" to use policy tools in seeking to achieve the goal and showing readiness to support the economy under emergencies will suffice, according to Martin Schulz, chief policy economist at Fujitsu Ltd.
"I don't think that the stimulus can be reduced any time soon. It will still be a difficult year," he said. "I do think the stimulus will shift more directly towards growth-oriented targets such as (supporting businesses for) digitalization and green growth."
Kuroda, whose current term as BOJ chief ends in 2023, appears confident that the easing framework will eventually do the trick.
"We will strenuously maintain powerful monetary easing by ensuring the sustainability and mobility of policy tools and realize the 2 percent target," the governor said.
(Su Xincheng contributed to this story)
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