MNI INSIGHT: BOJ Can Manage Econ Soft Spot Via Lower 10Yr Rate

By Hiroshi Inoue

     TOKYO (MNI) - The Bank of Japan will lower 10-year yields rather than

short-term rates to cope with any temporary soft spots in the economy under the

new policy framework presented at the July 30/31 meeting, MNI understands.

     The BOJ can now, if needed, look to push the 10-year JGB yield to -0.2%, or

a shade lower, via the purchase of JGBs and up to Y6 trillion in ETFs. 

     But bank officials think that the BOJ cannot lower the 10-year yield to far

below -0.20% unless the board amends the policy of keeping the 10-year rate

'around zero percent'.

     The BOJ buys JGBs to stabilize the 10-year yield "around zero percent" but

allows some flexibility within the newly adopted -0.2% to +0.2% band.

     BOJ officials see no need to change July's policy framework now, with the

economy expanding moderately, as predicted at the July policy meeting, although

they are concerned about the impact of the U.S.-China trade dispute on global

trade and Japan's economy.

     If a worsening of the global economy and global demand materialized, it

would increase the volatility in global financial markets, BOJ officials warn,

hitting business sentiment and slowing capital investment, which in turn will

undermine the foundation for a moderate economic expansion.

     --NO CHANGE NOW

     Although there is currently no need for the BOJ to change policy, a sharp

downward revision to the median growth and inflation forecasts, or if the

momentum toward the 2% price target weakened, there would be a need to change

the framework of monetary policy or conduct more easy policy.

     A stronger yen weighing on the economy is a main concern for the BOJ,

pressuring the BOJ to lower the short-term interest rate from its current

-0.10%. Negative rates, first introduced in January 2016, were effective in

curbing the yen's rise, but it was criticized by financial institutions, whose

profitability was hit.

     The BOJ introduced the yield curve control policy, currently targeting the

overnight interest rate at -0.1%, in September 2016 to help mitigate the

side-effects of its negative interest rate policy

     The BOJ doesn't rule out deepening the negative rate as a tool to

strengthen easy policy, but it remains unconvinced a further deepening is the

best solution.

--MNI Tokyo Bureau; tel: +81 90-2175-0040; email: hiroshi.inoue@marketnews.com

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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