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JAPAN FIX - 23/05/22




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MNI (Tokyo)

The Bank of Japan will likely only tweak its framework for buying JGBs following its upcoming Policy Review, steering clear of any radical reform such as widening JGB trading bands as that would harm its easy monetary policy, a former senior BOJ official told MNI.

"Widening the range of (10-year JGB) bond yields isn't consistent with the BOJ policy of creating easy policy by lowering long-term interest rates," Hiromi Yamaoka, a former director-general of both the Financial Markets and Payment and Settlements department, said Wednesday.

"It is very difficult for the BOJ to widen the range of 10-year bond yields and raise longer-end bond yields," he said.

Yamaoka, currently a board member and director-general at the Future Institute for Economic Research and Financial Strategy, said at an effective zero lower bound, a central bank can only increase the impact of easy policy by sacrificing the "at the sacrifice of flexibility of monetary policy."

"For example, (when) a central bank pledges to keep the policy interest rate at zero for the next six months or one year, this is a commitment and means that the bank will not change policy in a flexible manner. It is very difficult for the central bank to keep easy policy, while increasing the flexibility of monetary policy," he said.

According to Yamaoka, if the BOJ widens the permitted trading range of 10-year JGB yield, it gains flexibility over monetary policy, but at a cost to easy policy.


Yamaoka also addressed the difficulties the BOJ could face attempting to steepen the curve by massaging longer-dated yields higher.

"How much and when the BOJ buys government bonds is at the discretion of the Financial Markets Department. It is very strange that the board would interfere," Yamaoka said.

"The BOJ cannot write a policy statement where the board asks officials in charge of daily operations to hold back on buying longer-end bonds," he added.

The board sets the parameters on bond buying, but operational independence takes precedence over within those guidelines, he noted.

"People who say the BOJ will widen the 10-year band and raise longer-end bond yields aren't familiar with or don't understand financial operations and the directive," Yamaoka said. "For example, some suggest that the board ask the operational section to keep the 10-year JGB at around zero but to raise longer-end bond yields. It's very difficult."

The BOJ targets the 10-year yield as trading volume of the benchmark JGB is heavy, enabling officials to easier control the rate through operations, he said.

Accepting that the BOJ has few options, Yamaoka said one would be continued jawboning by the governor that it is undesirable for longer-end bond yields to fall sharply.

MNI Tokyo Bureau | +81 90-2175-0040 |
MNI Tokyo Bureau | +81 90-2175-0040 |

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