January 12, 2017 9:10 am JST
BOJ Watch

Trump tempests to test Kuroda's steadying hand

Past performance no indication of future success for yield curve control

KEIDAI SANDA, Nikkei staff writer

Bank of Japan Gov. Haruhiko Kuroda

TOKYO -- The Bank of Japan may find it harder to steer interest rates once U.S. President-elect Donald Trump takes office, given the potential for big swings in bond yields on both sides of the Pacific as the new administration translates his rhetoric into real-life policy.

The Japanese central bank has been using a variety of tools to keep a lid on long yields, which have faced upward pressure from the strong dollar and higher U.S. interest rates -- developments that followed Trump's election win in November. Rates' march upward has paused, but the BOJ remains on guard against another advance. The big question is what the bank would do in that event.

Since shifting the focus of its monetary policy in September from the money supply to the yield curve, the BOJ has tried to manage interest rates by adjusting its ordinary Japanese government bond purchases, buying unlimited quantities of JGBs at fixed yields, and other means. It appears to be weighing not only whether its actions steer the benchmark 10-year yield to around zero, but also other factors, such as speed.

"Assessing the entire yield curve is a process of complicated and comprehensive evaluations," Masayoshi Amamiya, a BOJ executive director, said in a speech Wednesday.

The BOJ's rate-control actions have coincided with rapid changes in spreads between yields for target maturities and the 10-year yield. Back when the BOJ adopted yield curve control, it said it would try to keep the curve close to "current levels," but it seems now to be giving little thought to that. The determining factor is "whether levels are consistent with our monetary policy objectives," said a senior BOJ official.

Even BOJ Gov. Haruhiko Kuroda seems disinclined to apply the "around zero" target to the letter. "I don't believe it's very meaningful to debate whether or not we allow going beyond plus or minus 0.1%," Kuroda has said.

Up to now, the BOJ has succeeded in hewing close to zero, but it remains to be seen whether the bank can keep pulling this off. Some observers point to a Dec. 14 market operation when the bank increased its JGB purchases, only to return to the original level on Dec. 28. If the BOJ steps up bond buying when interest rates rise then later walks it back, the market might get smart to the pattern, undermining the effectiveness of the rate-control mechanisms, goes the argument.

As unforeseen Trump risks, like his finger-wagging at Toyota Motor, manifest themselves, interest rates are looking even more prone to sudden jerks. Concerns also remain about the damage the strong dollar and high Treasury yields will do to emerging markets, which would become a drag on the global economy.

Amamiya claimed Wednesday that the market seems to be adjusting to yield curve control "in an orderly manner." But that does not mean the BOJ can sit back and relax at the controls.

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