MNI INSIGHT: Exit From Negative Rates An Option For BOJ

The Bank of Japan may be leaning towards taking its overnight rate out of negative territory rather than raising the upper limit of its yield control range in response to rising inflation and to ease speculative pressure as other major central banks tighten policy, MNI understands.

While some investors are betting that the BOJ will have to increase the 0.25% ceiling for its 10-year bond yield target range in order to stem depreciation of the yen, and as government officials call for action against inflation, officials fear that modifying the yield curve framework would be too drastic a tightening for a still-weak recovery to withstand.

Raising the overnight rate from -0.1%, perhaps to 0%, would improve banks’ low interest rate margins – something else for which lawmakers have called – but with little tightening effect on the economy at large. The BOJ is also under political pressure to take action in line with government efforts to alleviate the effects of rising prices on household budgets.

WRONG SIGNAL

A MNI has reported, the BOJ could consider adjusting its easy monetary policy around the autumn if the yen stabilises at a lower level around 140 to the dollar, sending inflation to temporary peaks near 3% and driving wage hikes into 2023. (See MNI INSIGHT: Govt Pressures Add To Weak Yen As BOJ Eyes Change)

But bank officials remain very wary of any move that would be interpreted as a move towards unwinding easy policy, and the BOJ would continue to pledge to maintain low interest rates for as long as necessary to achieve the 2% price target.

While some former officials have called for the BOJ to raise or even drop its ceiling on bond yields, the central bank judges that such a move would only prompt foreign investors to redouble their bets on further concessions.

BOJ Governor Haruhiko Kuroda and Shinichi Uchida, the executive director in charge of monetary policy, have said that raising the upper end of the curve would be equivalent to policy tightening.

But the BOJ is nonetheless facing calls to do something as inflation erodes purchasing power, with signs that success in upper house elections later this month could prompt Prime Minister Fumio Kishida to bring forward the search for a replacement for Kuroda, whose second term expires in April.

TANKAN

While BOJ officials remain doubtful over the longer-term health of the economy, the central bank’s Tankan survey provided some positive signs on Friday, with both short- and medium-term inflation expectations at firms rising in the three months to June. Capital investment plans remained solid and the data will have endorsed the BOJ’s view that business is more positive about raising retail prices in line with higher international commodity prices and a weaker yen.

The diffusion index measuring the difference between manufacturers reporting a rise rather than a fall in output prices stood at +34 in June, while the equivalent measure for input prices was +77, both the highest levels since May 1980.

But businesses have not yet fully transferred cost increases to consumers, and the BOJ will be looking to see whether household demand withstands higher prices as wage increases are outpaced by inflation.

The Tankan also showed that the financial environment remained accommodative, making it less likely that the BOJ will extend a special programme to support smaller firms’ financing.