MNI INSIGHT: BOJ May Seek 10-Year Yield Hike After 1% CPI

--Next Policy Move Under Forward Guidance Seen Data Dependent 

By Hiroshi Inoue

     TOKYO (MNI) - Under its new forward guidance, the Bank of Japan may

consider raising the target for the 10-year bond yield from around zero when

inflation exceeds 1% and is set to keep rising, but it will probably maintain

the negative 0.1% target for the overnight rate, its traditional policy tool,

for a longer period, MNI understands.

     Given the slow pickup in inflation and the uncertainty over retail price

hikes, BOJ policymakers are expected to hold off on raising rates at least until

early next year, checking the pulse of the economy and measuring the

side-effects of easing for the six to nine months from their last meeting on

July 30-31.

     The BOJ board promised to keep the historically very low levels of interest

rates for months to come in its July policy statement, making market

participants believe that the bank will stay put at least until the year-on-year

rise in the core CPI (excluding fresh food) reaches 1.5%, the median board

forecast for fiscal 2019 ending March 2020.

     --DATA DEPENDENT

     However, people familiar with BOJ thinking said whether to raise rates as

part of the bank's gradual normalization efforts would depend on the board's

analysis of the strength of growth and inflation as well as financial system

stability.

     A slight uptick in long-term borrowing costs in step with higher inflation

-- which is necessary to keep the cumulative effects of easing from becoming too

stimulative -- would not change the super-low interest rate environment.

     Some BOJ officials also believe they need to raise rates when the economy

is sound so that they could lower them in an economic downturn.

     Under the forward guidance, the BOJ said it "intends" to maintain the very

low levels of short- and long-term interest rates "for an extended period of

time," taking into account uncertainties over growth and inflation including the

effects of the sales tax hike scheduled in October 2019.

     The BOJ said it aimed to make monetary easing sustainable by conducting

asset purchases "in a more flexible manner."

     The bank also said it recognizes that "this will lead to achieving the

price stability target of 2% at the earliest possible time, while securing

stability in economic and financial conditions."

     By maintaining the official target for the 10-year bond yield "around zero

percent" but allowing to move in a wider range than before, the BOJ is trying to

have the best of both worlds -- keeping expectations for continued large

monetary stimulus while addressing one of the side-effects, the lost function of

the bond market.

     --BUYING TIME

     By promising to keep zero to slightly negative interest rates "for an

extended period of time," the BOJ will watch how growth and inflation evolve

without changing the key policy targets for at least for six to nine months from

the July 30-31 meeting, "buying some time before figuring out what to do next,"

according to a person familiar with BOJ thinking.

     Forward guidance by nature is ambiguous because the outlook for growth and

inflation is uncertain and the conduct of monetary policy depends on economic

data, he said.

     The person added that the board is more focused on the stability in

economic and financial conditions than before because unstable conditions would

prevent the BOJ from achieving the 2% inflation target.

     Going forward, if the BOJ detects the risk of higher inflation pushing down

real interest rates further and making the side-effects worse, officials will

consider raising the long-term interest rate.

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

--MNI Tokyo Bureau; tel: +81 90-4670-5309; email: max.sato@marketnews.com

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