MNI INSIGHT: BOJ To Mull Longer-Date JGB Yield Target

By Hiroshi Inoue

     TOKYO (MNI) - Directly targeting the longer-than-10-year sector of the

yield curve, or at least adding it to a suite of points directly targeted on the

curve, in order to prevent yields in the super-long sector of the curve falling

sharply will be one option that the Bank of Japan can take if it decides further

curve control measures are needed, MNI understands.

     Under its current yield curve control policy, the BOJ sets its long-term

policy rate at the level of the 10-year JGB yield, although it isn't obliged to,

giving it maximum policy flexibility and any targeting further along the curve

could help stop the curve flattening excessively.

     BOJ Governor Haruhiko Kuroda has previously said that a sharp drop in super

long-term yields is undesirable, being a negative for life insurance firms and

pension funds, whilst worsening consumer sentiment.

     With downside risks picking up, the BOJ is getting more concerned that the

risk that momentum towards achieving the price stability target will be lost and

will consider additional easing measures, including deepening the short-term

policy rate further into negative territory from the current -0.1%, in turn

lowering short- and medium-term rates.

     Kuroda has previously said should the BOJ conduct additional easing, the

bank will lower short- and medium-term interest rates, effectively stimulating

activity and prices.

     --OUTPUT GAP

     The BOJ is cognisant that continued global weakness will hit Japan's

economy, hitting the output gap, which it sees as a key factor underpinning

momentum towards price stability.

     Kuroda has said that if downside risks to overseas economies materialize,

Japan's economy will slow substantially as exports and capex are hit.

     "If this happens, the momentum toward achieving the price stability target

could be affected through shrinkage of the output gap," he warned.

     The economy is expected to be further pressured in the fourth quarter due

to a slowing in consumer spending following the October 1 consumption tax hike,

with policymakers now pinning hopes on a pick-up in Q1, thus helping the BOJ to

maintain the view the positive output gap will remain.

     Japan's estimated positive output gap narrowed to 1.04 percentage points in

the April-June quarter from 1.64pp in Jan-Mar. It was the 11th straight quarter

with a positive reading, which, theoretically, should increase pressure on both

consumer prices and inflation expectations, albeit with a lag of a few quarters.

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

[TOPICS: MMJBJI,MAJDS$,MMJBJ$,M$A$$$,M$J$$$,MT$$$$,MX$$$$]