Photo/Illutration The Bank of Japan headquarters (Asahi Shimbun file photo)

What could change under BOJ’s March policy review?

The Bank of Japan is conducting a review of its policy tools to make them more sustainable, as the hit to the economy from the coronavirus is seen prolonging the battle to achieve its elusive 2 percent inflation target.

It will release the findings in March.

Below are some options likely to be discussed by BOJ policymakers, or being floated by markets as a possibility:

TWEAK GUIDANCE ON ETF PURCHASES--HIGHLY LIKELY

Wary of its ballooning holdings of risky assets, the BOJ wants to give itself more flexibility in tapering purchases of exchange-traded funds (ETF) when markets are calm.

Doing so would leave the BOJ with more scope to ramp up buying when market turbulence threatens Japan’s economy.

The BOJ may tweak its current pledge to buy ETFs by up to 12 trillion yen ($114 billion) per year, and replace it with a more vague guidance. Opponents of the move are worried about the risk of triggering a stock market sell-off.

FINE-TUNE OPERATION OF YCC--HIGHLY LIKELY

The BOJ has been successful in keeping interest rates boxed in a tight range under yield curve control (YCC)--but perhaps too much with its huge presence drawing criticism for drying up market liquidity and distorting pricing.

To address such concerns, the BOJ will find ways to let market forces drive bond prices such as by widening the implicit range it sets around the 0 percent target for 10-year bond yields.

It could also introduce steps to prevent super-long yields from falling too much, such as by reducing purchases of bonds with longer maturity.

MODIFY BOJ’S TIERED RESERVE SYSTEM--LIKELY

The BOJ has introduced several lending schemes that reward financial institutions 0.1 percent interest for borrowing money from the central bank, including one to nudge them into boosting lending to cash-strapped firms hit by COVID-19.

Critics say the schemes could push up short-term rates and undermine the effect of the BOJ’s negative rate policy.

The BOJ may make technical tweaks to its three-tiered reserve system, such as increasing the pool of funds for which negative rates apply.

BUY OR ACCEPT GREEN ASSETS AS COLLATERAL--UNLIKELY

The BOJ has said the review will aim to make its policy more “effective,” suggesting it could look into fresh tools that support government efforts to boost Japan’s long-term growth.

Some market players believe the BOJ could begin buying or accepting environment-friendly “green” assets as collateral for its lending schemes. That would mesh with premier Yoshihide Suga’s “green” growth strategy that seeks to boost investment in carbon-neutral technology.

Deputy Governor Masazumi Wakatabe, however, ruled out the idea, saying it was beyond the realm of the review.

OVERHAUL YCC, TWEAK FORWARD GUIDANCE--UNLIKELY

The BOJ has been clear on what won’t change after the March review. It will not overhaul YCC, as well as its 2 percent inflation target and forward guidance such as a pledge to maintain its ultra-easy policy until inflation stably exceeds 2 percent.

That means the review will be more a fine-tuning of the BOJ’s current policy framework to make it more sustainable.

Related News