TOKYO (Reuters) – The Bank of Japan may miss a numerical target for buying risky assets at Friday’s policy review, highlighting the rising cost of a long discount and marking a turning point for Governor Haruhiko Kuroda’s massive incentive program.
The central bank also seems to be clarifying the extent to which bond yields will be able to move away from its 0% target, and considering measures to address the negative interest rate side effects.
The accumulated cost of Kuroda’s eight-year test to burn inflation, while fighting economic headaches from the COVID-19 pandemic with a shrinking equipment package, has raised questions about the sustainability of the BOJ’s mitigation policy.
“The BOJ’s current framework is a snapshot of steps taken over the last eight years. It’s great to clean up some of them, ”said Shigenori Shiratsuka, a former BOJ chief executive.
“But that may be something too ambitious for the BOJ to take forward at the March inquiry. ”
BOJ review has drawn close market attention as global recovery hopes to push bond yields up in many economies including Japan, challenging BOJ efforts to boost 10-year yields at zero under its output loop control (YCC) policy.
The conclusions of his review will be announced after a two-day policy meeting that ends Friday, where the BOJ is expected to keep its interest rate targets unchanged.
CHALLENGE COMMUNITY
With the strong criticism of buy-in pulls to sway markets, the BOJ buys futures-traded funds (ETFs) similar to frontier currency intervention: stepping in only when panic event triggers market turmoil, according to sources familiar with BOJ thinking.
That would mean watering down, or removing one of its two pledges on ETFs – to buy them at an annual rate of 6 trillion yen ($ 55 billion) and up to 12 trillion yen.
Sources say the BOJ will not want to give the impression that it is dialing a stimulus incentive even if it is tapering.
This is no easy task even for Kuroda who, as a former top Japanese currency reputable, was known for his skills in manipulating yen movements with verbal warnings.
The review will also discuss ways to bring life back to a restrained bond market led by BOJ. The challenge is to point to markets that will allow the BOJ to move yields more – but not rise too much and hurt a weak economy.
The controversial targets had led to mixed messages with Kuroda and his deputy, Masayoshi Amamiya, which left investors second-guessing BOJ’s intentions.
The BOJ has said that any changes it makes at the review will be better for its tools than a review of YCC.
“It is unlikely that the BOJ can produce a result that will have a significant impact on the economy and markets,” said Hirohide Yamaguchi, former deputy governor of BOJ.
“The review may be just a demonstration of a move that it is doing ‘something’ to cover the cost.”
($ 1 = 109.1000 yen)
Edited by Jacqueline Wong