Facing low inflation, BOJ to mull steps to make stimulus sustainable - TNBC UK

TOKYO – According to the local reports, the ‘Bank of Japan will next week consider changes to its massive stimulus programme’ to make it more sustainable, such as allowing greater swings in interest rates and widening its stock-buying selection.

Governor, Haruhiko Kuroda is gradually walking away from his radical stimulus programme deployed five years ago to shock the public out of a sticky deflationary mindset.

They would also come as a recent slew of soft data is seen forcing the central bank to trim its price forecasts at the July 30-31 rate review, and concede that inflation will fall short of its 2 percent target up to three years from now. At the July rate review, the BOJ will also issue a quarterly report with new growth and inflation projections. The report will also look into structural factors weighing on inflation. While the BOJ would struggle to justify whittling down stimulus with inflation still distant from its target, it is nonetheless under pressure to address the rising cost of prolonged easings, such as the hit to bank profits from near-zero rates, which would require raising rates. Under its yield curve control (YCC) policy, the BOJ pledges to guide short-term interest rates at minus 0.1 percent and 10-year bond yields around zero percent. It also buys government bonds and risky assets, such as exchange-traded funds (ETF) and corporate bonds, to flood markets with cash.

Sources have told Reuters the BOJ, facing stubbornly low inflation, is in unusually active discussions on making tweaks to its rate policy and stock-buying techniques. After half a decade of heavy money printing failed to fire up inflation, BOJ policymakers are caught in a bind. The BOJ will keep its yield targets intact but could signal that it would allow long-term rates to move more flexible, either by tweaking its policy statement or through Kuroda’s comments at his post-meeting briefing, the sources said.

The sources said the nine-member board will thus discuss ways to make its policy more sustainable, mainly via tweaks to its asset-buying techniques and guidance on its yield targets. If the achievement of the price target takes time, the BOJ’s policy will last longer. That means the cost of easing will keep accumulating,” one of the sources said on condition of anonymity due to the sensitivity of the matter.

The sources said, “Several options are on the table with a final decision on which steps to take depends on how big the downgrade in the board’s price projections could be. Among them would be to tweak the language of the BOJ’s policy statement to allow yields to rise more naturally”.

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