TOKYO – Japan’s central bank is prepared to carry out monetary policy adjustments designed to increase its flexibility and make life easier for financial institutions, sources told Nikkei.
During its two-day policy meeting starting Thursday, the Bank of Japan will study measures that would allow long-term interest rates to move in a slightly higher range of about 0.25% or so compared to 0. , 2% current. The idea is to keep interest rates low while encouraging the market to function normally, giving financial institutions the opportunity to increase revenues.
The bank would also abolish its goal of buying exchange-traded funds, now 6 trillion yen ($ 55 billion) per year, and instead promise to make such purchases only in times of market turmoil.
As news of the BOJ’s intentions spread on Thursday, the Japanese 10-year government bond yield rose to 0.115% at one point, 0.025% higher than the day before. The yen also rose against the dollar, while Japanese bank stocks rose.
Although the bank insists that it will continue with large-scale monetary easing to avoid deflation amid the COVID-19 pandemic, its current approach has posed some challenges, including affecting the profits of financial institutions and hampering the functions of the financial institution. market.
The BOJ said at its December meeting that it would conduct a policy review. The findings are expected to be released after the end of the meeting on Friday.
The current policy of easing focuses on controlling both short and long-term interest rates, inducing short-term rates to fall by 0.1% and long-term rates to remain stable at 0%. These goals will remain the same.
To manage long-term rates, the BOJ buys government bonds to limit fluctuations in 10-year yields within a band of approximately plus or minus 0.2%. The planned policy change would allow a little more room for maneuver.
As for asset purchases, the bank initially buys about 6 trillion yen, or up to 12 trillion yen, in ETFs per year. The 6 trillion yen target would be removed from its policy, avoiding a situation where the BOJ is forced to make purchases when prices are high, but allowing it to buy large volumes if prices plummet.
The BOJ has a similar policy of buying real estate investment funds worth 90 billion yen annually, in principle, or up to 180 billion yen. This 90 billion yen target would also be removed.
Allowing more flexibility in interest rates would create more opportunities for banks to profit from buying and selling government bonds. In times of economic recovery, super long-term rates of more than 10 years often rise, improving conditions for asset managers such as insurers and pension funds. An assessment by the BOJ found that even a band as wide as 0.5% or so around the long-term target would not compromise the effectiveness of its easing policy.
Short-term rates will remain at the current 0.1% and could be lowered further if necessary, for example during periods of yen appreciation.
Low interest rates require policies to offset risks, as banks tend to be more cautious about lending. At the same time, despite signs of improvement, the BOJ still expects the economy and property prices to recover slowly. Market prospects also remain uncertain, after long-term rate hikes in the United States sent stocks tumbling.