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Economy

BOJ allows more flexible movement for long-term rate, says Kuroda

Japan's central bank aims to improve bond market function and ensure policy sustainability

Haruhiko Kuroda, Bank of Japan governor, on Tuesday said the bank had tweaked its monetary easing programs to enhance policy sustainability. (Photo by Wataru Ito)

TOKYO -- The Bank of Japan will allow the benchmark long-term policy rate to move over a wider range, Governor Haruhiko Kuroda said at a news conference on Tuesday.

The move shows the central bank’s effort to improve the function of the bond market in Japan, which has been repeatedly damaged by the BOJ’s extensive monetary easing policy.

"The Bank of Japan will consider letting the long-term rate fluctuate more to some extent," said Kuroda, adding that the new guidance intended to allow yields to move at double its current range.

The policy board left its benchmark short-term interest rate at minus 0.1% and its long-term interest rate near zero. Since the bank started to control the Japanese government bond yield curve as a policy measure in September 2016, it has sent a message through the markets that it would allow the long-term rate to move only between minus 0.1% and plus 0.1%. According to Kuroda, the rate will move between minus 0.2% and plus 0.2% from now on.

Ahead of the policy meeting, some market participants expected the BOJ would allow the rate to go up, which would have been seen as gesture of giving up on its 2% yearly inflation goal. 

"We do not intend the rate to just rise," said Kuroda. The BOJ decided at the meeting Tuesday to newly implement forward guidance of its policy. "Our forward guidance says the bank intends to maintain the current extremely low levels of short- and long-term interest rates for an extended period of time," said Kuroda, reaffirming the commitment to achieve 2% inflation as soon as possible.

Kuroda admitted at the news conference that it would take longer to achieve 2% inflation than the bank had anticipated, making the forward guidance necessary. The policy board forecast inflation for fiscal 2018 at 1.1%, for fiscal 2019 at 1.5%, and for fiscal 2020 1.6% -- all missing their targets.

Prolonged easing would increase the likelihood of further stressing the markets, especially the bond market. Because financial institutions are the main players on the bond market, losing its function could shake the whole financial system.

"No problem is seen in the financial intermediary function at the moment," said Kuroda. "But the Bank of Japan is aware of the risk that the financial intermediation may grow stagnant in the future." This was a more gentle stance toward financial institutions by the bank, considering the fact that Kuroda once said: "the bank does not run monetary policy for financial institutions."

Some saw Tuesday’s decision as showing the limitations of easing as the BOJ decided against prolonging this policy while lowering its inflation forecast. "I don’t buy that idea," said Kuroda. "We will ease further when necessary. Nothing has changed in that matter."

The markets reacted positively on Tuesday. The 10-year Japanese government bond rate fell further to 0.045% from 0.060% before the conference and from the previous day’s close at 0.095%. The yen dropped against the dollar to 111.59 yen from 111.35 yen right before the press conference.

The newly introduced forward guidance mentioned uncertainties related to the rise in consumption tax that is scheduled to take place in October 2019. This could be taken as a request to Prime Minister Shinzo Abe to ensure the rise does not have a negative impact on economic activity and prices.

"You should not read too much into it," Kuroda said.

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