* Key message will be similar to the deputy governor’s latest comments
* Leads can be in a spread range around the 0% BOJ target
* Clarification of the BOJ’s preferred area will help stabilize markets
* The current policy statement does not refer to your preferred area (Adds details to the debate expected at the March review, background on YCC)
TOKYO, March 12 (Reuters) – The Bank of Japan is likely to include clearer guidance in its policy statement on what it sees as an appropriate level of volatility in long-term interest rates, sources said, in an effort to show that it will not accept increases that have hurt the economy.
The move would be part of a BOJ review of its policy instruments next week, which aims to make its stimulus program more sustainable as pandemic coronavirus infection pushes inflation further away from the bank’s 2% target.
While there is no consensus within the BOJ, the guidance may be in a distributed form around its 0% target for 10-year bond yields, three sources familiar with speculation said.
The key message would be similar to recent comments by BOJ Deputy Governor Masayoshi Amamiya that the outcome of a larger move should be allowed “as long as it does not reduce the impact of cash discounts”, they said.
“What is important is to clarify the BOJ’s position that it will not retaliate against incentives,” said one source, noting that it was one idea to include a reference to an area in the statement.
“It is desirable to provide clearer guidance on the level of variation that the BOJ will accept,” said another source.
The review has attracted the close attention of markets as a global recovery hopes to push up output in many economies including Japan, challenging BOJ’s efforts to bring 10-year yields to zero under its output loop control (YCC) policy.
The reasons for the review include allowing market forces to move yields more and breathe back into a market that has been calmed by heavy BOJ bond purchases – without making a jump in yield. may prevent fragile relapse.
INCLUDING TARGETS
One focus of the review, which will take place on March 18-19, is how a 40-point fixed point band under which the BOJ allows 10-year yields to move around their 0% target .
Markets have begun to define it as a BOJ line in the sand since Governor Haruhiko Kuroda referred to it in 2018.
But the group has never made a statement in a BOJ policy statement, which only says that “allowed to change slightly reflect economic developments and prices” – causing market turmoil. in terms of how strongly the BOJ would protect it.
Clarifying BOJ’s preferred area in the statement, which was issued after each policy meeting, would help stabilize markets by removing uncertainty about its intentions, some analysts say.
But critics warn that adopting a tight numerical range would run counter to the purpose of the review, which is to allow yields to move more freely around the bank’s 0% target.
A consensus within the BOJ has not clarified the best way to think about product movements, with a final decision dependent on market movements up to the review, the sources said.
With the Japanese economy still recovering from the pandemic, however, the BOJ is moving toward maintaining the current band or consolidating the intolerance that has plagued Japan. ‘Any sudden spike in output is hurting the economy,’ they said.
After years of heavy buying, the BOJ has nearly half of the Japanese government bond (JGB) market and has successfully maintained a 10-year yield in a tight range around its 0% target.
But market liquidity dried up as a result, forcing the BOJ to create ways to revive the bond market to make YCC policy more sustainable. (Reporting by Leika Kihara; Additional report by Takahiko Wada; Editing by Catherine Evans)