Bank of Japan sets long-term rate target in major policy overhaul

The Bank of Japan shifted the focus of its monetary stimulus away from a rigid target for expanding the supply of money to controlling the shape of yields across different maturities.

Governor Haruhiko Kuroda led his board in keeping the benchmark rate for a share of bank reserves at negative 0.1 per cent. The central bank said that the monetary base target, which previously had been set at annual increases of 80 trillion yen (€700 billion), may now fluctuate in the short term as policymakers seek to control the yield curve.

The BoJ scrapped a target for the average maturity of its government bond holdings. Board members also pledged to expand the monetary base until inflation is stable above the 2 per cent target – committing to an overshoot of consumer-price gains.

The BoJ has been the most daring of global central banks in using monetary stimulus to confront deflationary pressures and stagnation, but Mr Kuroda recently began to publicly weigh the costs of its extraordinary easing against the benefits, a shift from his “whatever-it-takes” approach of the past three-plus years.

Listening to banks

"The BoJ's decision to steepen the yield curve showed they are taking into account the situation of financial institutions," said Takeshi Minami, chief economist at Norinchukin Research Institute. Atsushi Takeda, an economist at Itochu in Tokyo, said the decisions suggested the BoJ was "reaching its limit to monetary options".

Scepticism about the odds of success for Abenomics, prime minister Shinzo Abe’s economic revival programme, may rise if the BoJ is judged to be struggling with the limits of the aggressiveness that marked the first years of Mr Kuroda’s tenure.

The yen weakened against the US dollar and traded at 102.54 at 1.39pm. The Topix stock index rose 1.8 per cent. The yen had gained 18 per cent this year as of Wednesday morning in Tokyo.

Review

The BoJ in July announced a comprehensive review of its policies to assess their effectiveness and determine how to reach its distant 2 per cent inflation target.

It came as core consumer prices fell in July at the fastest pace since Mr Kuroda took the helm of the BoJ in March 2013. Market participants increasingly shrugged off Mr Kuroda’s repeated vows that he would act whenever necessary, helping drive the yen to long-term highs.

The BoJ faced a backlash after first deploying negative rates in January. Bank shares tumbled at the time, the yen gained strength and household sentiment worsened. Mr Kuroda recently acknowledged that negative rates had cut into financial institutions’ profits, while pointing out the policy had driven borrowing costs lower.

The BoJ also faces questions about the sustainability of its purchases of Japanese government bonds. The central bank now owns a third of outstanding JGBs. The pace of its buying is draining the market of supply, and many commercial banks are running out of JGB inventory to sell. – (Bloomberg)