BOJ fine-tunes massive stimulus in long drive to boost prices

TOKYO (Reuters) – The Bank of Japan slightly loosened its grip on long-term bond yields on Friday and laid the groundwork to taper its huge purchases of risky assets, as part of steps to make its ultra-easy policy sustainable enough to weather a prolonged battle to fire up inflation.

In a review of its policy tools announced after a two-day meeting, the BOJ said it would allow long-term interest rates to move up and down by 0.25% around its 0% target, instead of by the current implicit band of 0.2%.

To give itself more room to wind down its massive stimulus, the central bank also removed an explicit guidance to buy exchange-traded funds (ETF) at an annual pace of roughly 6 trillion yen ($55.21 billion).

Instead of buying at a set pace, the BOJ said it would step in only when markets destabilise under a 12-trillion-yen ceiling set last year when the initial COVID-19 hit jolted stock prices.

Governor Haruhiko Kuroda brushed aside the view that the moves were a prelude to a full-blown exit from years of ultra-easy policy, stressing that the tweaks instead would make his stimulus sustainable and more effective.

“We won’t tolerate yield fluctuations that would have an impact on our monetary easing,” Kuroda told a briefing. We absolutely need to make sure the effect of our monetary easing isn’t hurt. We clarified that stance with our new guidance.”

The BOJ kept intact its target of -0.1% for short-term rates and 0% for the 10-year yield under its yield curve control (YCC) policy.

NO GAME CHANGER

BOJ officials have been dropping hints that they will allow yields to fluctuate more around the 0% target to breathe life back into a market made dormant by the bank’s dominance.

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But the central bank faced a communication challenge of having to convince markets that any move would not lead to a withdrawal of stimulus.

Kuroda stressed the near-term priority was to keep borrowing costs stably low to support an economy hit by the pandemic.

Indeed, the BOJ said it will not apply the rule rigidly when yields move below the band temporarily, but step in forcefully with unlimited bond purchases to prevent sharp rise in yields.

The conflicting goals made the BOJ’s tweaks so modest it will barely revitalise markets, some analysts say.

“It’s a very minor change. The difference between 0.25% and 0.2% is quite small,” said Masaaki Kanno, chief economist at Sony Financial Holdings in Tokyo. “There’s a long way to go before we even get close to 2% inflation,” he added.

The BOJ said it will also offer incentives for financial institutions that tap its loan programmes, as part of efforts to mitigate the side-effects of any additional interest rate cuts.

Specifically, the BOJ will pay interest to financial institutions that borrow from its various lending schemes.

The step was aimed at dispelling market views the BOJ had run out of ammunition to ramp up monetary support, Kuroda said.

“Some people say the BOJ cannot deepen negative rates because of the side-effects,” he said. “That’s not true. I don’t think it’s impossible to deepen negative rates.”

Many analysts, however, remained unconvinced the measures announced on Friday would help the BOJ achieve its price goal.

“In practical terms, there is not much for the Japanese economy in these policy tweaks,” said Joseph Capurso, currency analyst at Commonwealth Bank of Australia.

“One thing that the central bank did do is they made some tweaks to their various bank lending facilities. But these are just tweaks and I don’t think that they’re going to change the trajectory of the Japanese economy.”

($1 = 108.6700 yen)

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