MNI BOJ WATCH: Ueda Says Rate Path Will Depend On Prices

Bank of Japan Governor Kazuo Ueda insisted that further adjustments to monetary policy will depend on the outlook for the economy and prices, but that conditions must remain accommodative despite the decision to exit negative rates and scrap yield curve control earlier on Tuesday.

While the move away from negative rates came after the BOJ judged that inflation would reach 2% “in a sustainable and stable manner” toward the end of the projection period, Ueda noted that for the moment price expectations remained far from target. The BOJ will set its short-term interest rate just as other central banks manage monetary policy based on the outlook for economy and prices, the governor told reporters.

Earlier in the day, the BOJ’s board raised its unsecured overnight call loan rate to a range of between zero percent to 0.1% in its first hike since February 2007, and also ended its yield curve control policy, removing its 1.0% ceiling for the 10-year bond. However, the bank will maintain its Japanese-Government-Bond buying scheme at about the same pace, of around JPY6 trillion per month, as previously.

"NIMBLE" RESPONSE TO YIELDS

The BOJ will have a “nimble response" to any rapid rise in long-term yields, increasing its purchases and conducting fixed-rate bond buying operations in a flexible manner, Ueda said.

The governor ruled out the possibility that the BOJ would soon reduce the scale of purchases but noted that it would consider reducing the scale of its balance sheet in the future, though he provided no further details.

The BOJ intends to allow the market to set yields, he said. When asked about which yield levels would trigger additional purchases, he declined to answer, only saying that the BOJ’s Board trusted its operations department to function in a flexible manner.

The BOJ will not set an internal target for the long-term interest rate, but the Board and operations officials will remain in close contact and exchange views on market pricing, he said.

Japan’s economy faces risks to the downside from the global economy. There are also downside risks to domestic private consumption, Ueda said.

“The [upside] risk to price is not big now. But the risk is that corporate price-setting activity strengthens and inflation expectations rise. We need to keep that in mind,” Ueda said.