MNI INSIGHT:BOJ To Keep Range Unless Around-Zero Target Shifts

Any adjustment to the Bank of Japan’s yield target range would have to be accompanied by a change in the central 10-year target level of around zero percent, but while there is a chance the BOJ could shift its focus to a shorter maturity, officials still see the need to maintain monetary policy on its current easy settings, MNI understands.

Market speculation has mounted around the possibility that the BOJ could raise the upper limit of its -0.25-0.25% yield range in the second half of this fiscal year in response to continued high prices and downward pressure on the yen, but such a move would only come with a change to the central target.

Similarly, the BOJ would maintain its unlimited purchases of bonds at a fixed rate, which were introduced in April to defend the yield range, unless the around-zero percent target is adjusted.

Switching the target rate to a shorter maturity, such as the five-year bond yield, could be one option for the BOJ as it prepares an exit strategy from decades of easy policy, but it may still be too early for such a move, particularly given relatively low trading volumes in the five-year space. (See MNI INTERVIEW: Yen May Be Nearing End Of Depreciation-Hayakawa)

FED TIGHTENING

BOJ officials expect upward pressure on JGB yields to continue as the Fed tightens, but for the moment MNI understands that they consider that the upper-range limit should remain at 0.25% in line with the 2% inflation target.

Widening the range of the 10-year interest rate from 50 basis points would have an adverse impact on capital investment and on the economy more broadly, the BOJ considers. Bank officials are wary that any adjustment to the range could be interpreted as a sign of an impending move to tighten policy, while they see no additional negative side effects from the fixed-rate bond buying operations.

The view of most of the BOJ’s board is that there is no need to try to contain the current supply-driven surge in inflation, unless it begins to feed into a wage-price spiral.