MNI INSIGHT: BOJ's Message: Policy Tweaks Are Not Tightening

By Max Sato

     TOKYO (MNI) - The Bank of Japan has been sending an implicit message that

making slight adjustments to its huge asset purchases or the shape of the flat

bond yield curve would not amount to a tightening of very accommodative

financial conditions, MNI understands.

     The minutes of the bank's Sept. 20-21 policy meeting released Monday showed

some board members warned that extended aggressive monetary easing could

backfire by damaging financial intermediation and further delay the timing of

achieving 2% inflation.

     After the bank's latest policy meeting on Oct. 30-31, Governor Haruhiko

Kuroda said the BOJ board would debate an exit strategy on ways to reduce

massive monetary stimulus only when it could see a good prospect for achieving

the 2% inflation target or the target has been actually achieved.

     He didn't clearly answer the question as to whether the BOJ might tweak the

current flat bond yield curve or allow interest rates to rise modestly before

the 2% target is achieved.

     "It will be worth considering adjusting the yield curve as prices rise but

it is too early to have a specific debate at this point," he told reporters.

"Given current economic fundamentals, there is no need for interest rates to

rise or to allow higher interest rates now."

     His comments appear to be aimed at keeping market participants from

speculating that the BOJ is preparing to slow the pace of asset purchases.

     At the same time, his suggestion that the changing economic climate could

prompt the BOJ to review the policy target contained a key message from the BOJ

leadership, said a person familiar with the policymaking process at the bank.

     "The key point of his comment is that while real interest rates are falling

substantially, making a slight adjustment to nominal interest rates targets

would not amount to tightening," the source said, adding this point was detailed

in a recent speech by Deputy Governor Hiroshi Nakaso.

     Last month, Nakaso told a central banking seminar hosted by the Federal

Reserve Bank of New York that the BOJ's quantitative and qualitative monetary

easing launched in April 2013 "has produced remarkable effects."

     "Through the large-scale purchases of 10-year JGBs and a rise in inflation

expectations, the bank has succeeded in reducing real interest rates to levels

well below the natural rate of interest for the first time in its

two-decade-long battle with the zero lower bound on the short-term policy

interest rate," said the career central banker.

     Nakaso also said the current policy framework adopted in September last

year is more flexible than targeting the amount of assets the bank purchases.

     "Yield curve control is designed to be flexible and highly sustainable,

through which the most appropriate level of interest rates can be achieved in

line with developments in economic activity and prices as well as financial

conditions," Nakaso said.

     The minutes of the bank's Sept. 20-21 policy meeting showed some board

members noted recent remarks by Kuroda.

     That is, the current framework "incorporated a mechanism in which the

effects of accommodative monetary policy would be further enhanced through a

decline in real interest rates and a rise in the natural rate of interest, with

the economy continuing to expand moderately and the inflation and potential

growth rates rising."

     On the other hand, some members cautioned that the BOJ's aggressive easing

since April 2013 could have a negative effect on its goal by lowering profits

margins of lenders and killing the function of financial markets.

     Noting due attention should be paid to the impact of powerful monetary

easing on financial markets and financial institutions, those members "expressed

the recognition that it was necessary to avoid a situation in which the

functioning of financial intermediation was hampered and the timing of achieving

2% was delayed as a result."

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

--MNI BEIJING Bureau; +1 202-371-2121; email: john.carter@mni-news.com

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