MNI INTERVIEW2: No Need To Change ETF Scheme Now: Ex-BOJ Maeda

There Bank of Japan can leave its framework for buying ETFs unchanged at present and certainly not look to change it if it offers financial markets the perception of the central bank paring back on its easy policy, a former BOJ executive director said.

"The BOJ doesn't need to change the framework of ETFs buying as any change, including the scale of ETF buying, could be interpreted to mean the bank is unwinding easy policy," Eiji Maeda, president at Chiba-Bank Research Institute, told MNI in his first interview with foreign media since leaving the central bank.

"The BOJ needs to buy ETFs flexibly under the current framework, depending how stock prices develop," he said, adding, "stock prices are rising but the outlook for the economy is considerably uncertainty."

PREVENTING RISING RISK PREMIA

The BOJ has said that ETF buying is aimed at preventing risk premia from rising and Maeda said if they achieve that goal, they can pare back the buying. The Bank will judge overall risk premia through various factors, including stock prices, the speed of stock price movements, the real economy and corporate profits.

"Under the existing conditions, the BOJ will take the heightened uncertainties over the economy into consideration," Maeda said, although he noted the increase in the upper ETF limit from JPY6 trillion to about JPY12 trillion was designed to deal with volatile markets in March and April.

As to whether the BOJ should pare back purchases, Maeda said its is a "judgement" on whether it could be effectively communicated to markets. At present he thought it was very premature for the BOJ to exit ETF buying but when it did, he pointed to a two-tier processes – how the BOJ reduces ETF buying and how the BOJ reduces ETF holdings, and the first one is more difficult than the second one.

SPECIAL DEPOSIT FACILITY

Maeda also noted the BOJ's recent move to introduce the special deposit facility and said this could push the overnight call loan rate to an effective zero from the current -0.1%. However, he emphasized this would not impact overall monetary policy, as the bank would manage a higher overnight policy rate via daily open market operations.

"The new deposit facility is absolutely prudence policy and it will not affect monetary policy," he said.

The BOJ will pay interest of 0.1% to some excess reserves, to strengthen regional financial institutions' financial position.

Maeda said if regional banks are aggressive in their use of the new facility beyond BOJ expectations, those running the daily open market operations at the bank may have a difficult time controlling the overnight call loan rate.

However, "the BOJ has tools, such as changing the Macro Add-on Balance, to prevent the overnight call loan rate from rising to zero or higher. I don't think the BOJ will do it but the bank can conduct operations at negative interest rates," he said.