December 1, 2016 5:30 am JST
BOJ Watch

Central bank's rate focus hides urge to taper

Shock tactics rather than buying deployed to curb rates

JUN ISHIKAWA, Nikkei staff writer

TOKYO -- The Bank of Japan's interest rate-based monetary policy seems in part to be aimed at trimming bond purchases without angering easing hardliners or endangering progress toward inflation.

Surging U.S. long-term interest rates in the wake of the American presidential election are pushing up rates in Japan as well -- a situation the BOJ might ordinarily remedy by expanding the purchase of Japanese government bonds. But the central bank has been slow to take such action of late. The bond-buying plan for December, released Wednesday, shows purchases coming in around November's level.

The BOJ on Nov. 17 unleashed a new policy tool to keep rates from rising: so-called fixed-rate operations in which the bank offers to buy unlimited JGBs at a specified yield. Though this was a strong signal as to where the bank draws the line on rising rates, few JGBs actually changed hands. That the bank reached for what was effectively "jawboning" -- rather than a true market operation -- could mark a subtle shift in the BOJ's long-standing policy of "first boosting bond buying" when rates begin to climb, in the words of Seiichi Shimizu, director-general of the BOJ's Financial Markets Department.

When rates took a downward turn at the end of September, the BOJ's first response was to curb JGB purchases. Why, then, is the bank hesitant to move in the opposite direction?

Smokescreen

It could be that the true purpose of the bank's yield-curve control policy, introduced in September, is to enable a gradual drawdown of JGB purchases.

Few BOJ officials believe that simply buying more bonds will boost the benefits of monetary easing. If verbal arm-twisting involving no new bond purchases can successfully curb rising rates, all the better, the bank's view seems to go. After all, stepping up JGB-buying runs the risk of further damage to the bank's own finances.

The central bank has adopted a new policy that allows it to both step up and cut back JGB purchases as it pursues its targets. While appeasing proponents of quantitative easing, the move may have been designed to let the BOJ take a turn toward tapering.

In an October speech, Yutaka Harada, a member of the BOJ policy board particularly enamored of monetary easing, explained that the bank's new policy framework would result in increased bond-buying to address rising rates, but not cutbacks to remedy declines. The opposite now appears to be true. That is not to say the bank would not expand buying if rates were to face even stronger upward pressure. But the threshold for such action is certainly higher than it once was.

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