TOKYO -- The Bank of Japan plans to make its controversial negative interest rate policy the centerpiece of future monetary easing, promising to weigh further cuts as expansions to asset buying near their effective limit.
The plan will be included in a comprehensive assessment of its monetary policy to be compiled at a two-day meeting starting Tuesday.
Some observers had predicted that the bank would use the review as a chance to scrap negative rates in light of objections from the financial sector. With the economy lacking strength and prices facing downward pressure, the BOJ will instead consider taking the minus 0.1% deposit rate further into negative territory.
The BOJ policy board is expected to conclude in the review that the economic benefits of the negative rate announced in January outweigh the side effects. Gov. Haruhiko Kuroda and his deputy governors are unanimous on this point, and are expected to gain support from the majority of the other policy board members.
Any decision to take rates deeper below zero will require careful consideration of the yen's exchange rate and the state of the broader economy. And debate will likely proceed cautiously. "It's not as though we can keep lowering rates forever," a BOJ official said.
The bank will reaffirm its commitment to monitoring the worrisome side effects of negative rates. Dives in long-term yields have hurt returns for pensions and insurers, and have begun to weigh on consumer sentiment.
As a specific countermeasure, trimming purchases of Japanese government bonds with maturities longer than 25 years will be discussed. This aims to boost ultralong yields, giving financial institutions a better environment for earning returns. Purchases of shorter-term bonds could be increased to compensate, as some claim overall buying should be kept at the current level of 80 trillion yen ($783 billion) or so per year.
Need another option
The shift to negative interest rates as the core of additional easing comes as decreased bond market liquidity makes pumping cash into the economy with expanded asset purchases more difficult. As the prospects of a near-term U.S. interest rate hike retreat, the yen could appreciate, forcing the BOJ to consider more easing. Establishing the viability of further interest rate cuts would give the bank more options to draw on when necessary.
The BOJ will retain its target of 2% price growth, but will consider effectively abandoning a pledge to reach that target in two years. Setting a clear time frame for an easing program could be discussed to help demonstrate commitment to continued easing.
The bank will likely forgo purchasing foreign government bonds as suggested by some market players. Even if the BOJ were to label such purchases a fixture of monetary policy, buying those bonds could open Japan up to accusations of exchange-rate tampering from U.S. and European authorities, many at the bank believe.