The Bank of Japan may phase out a numerical target for its risky asset buying at a policy review on Friday, highlighting the rising cost of prolonged easing and marking a turning point for Governor Haruhiko Kuroda’s massive stimulus programme.
The central bank is also likely to clarify how much it will allow bond yields to deviate from its 0% target, and consider steps to address the side effects of negative interest rates.
“The BOJ’s current framework is a patchwork of measures taken in the past eight years. It’s ideal to clear some of them up,” said former BOJ executive Shigenori Shiratsuka.
“But that’s probably something too ambitious for the BOJ to embark on at the March review.”
The BOJ’s review has drawn the close attention of markets as global recovery hopes push up bond yields in many economies including in Japan, challenging the BOJ’s efforts to cap 10-year yields at zero under its yield curve control (YCC) policy.
The findings of its review will be announced after a two-day policy meeting ending on Friday, where the BOJ is widely expected to keep its interest rate targets unchanged.
With its massive buying drawing criticism for distorting markets, the BOJ will make its purchases of exchange-traded funds (ETF) similar to currency intervention: stepping in only when a shock event triggers market turbulence, according to sources familiar with the BOJ’s thinking.
That would mean watering down, or removing one of its two pledges on ETFs – to buy them at an annual pace of 6 trillion yen ($55 billion) and by up to 12 trillion yen.
Sources say the BOJ will not want to give the impression it is dialing back stimulus even if it was tapering.
This is no easy task even for Kuroda who, as Japan’s former top currency diplomat, was known for his skills in swaying yen moves with verbal warnings.
The review will also debate ways to breathe life back to a bond market made dormant by the BOJ’s dominance. The challenge will be to signal to markets the BOJ will allow yields to move more – but not rise too much and hurt a fragile economy.
The conflicting goals had led to mixed messages by Kuroda and his deputy, Masayoshi Amamiya, that left investors second guessing the BOJ’s intentions.
The BOJ has said any tweaks it makes at the review will be more a fine-tuning of its tools than an overhaul of YCC.
“It’s unlikely the BOJ can come up with an outcome that has a substantial impact on the economy and markets,” said former BOJ deputy governor Hirohide Yamaguchi.
“The review will probably be just a show of gesture that it’s doing ‘something’ to address the cost.”