MNI POLICY: BOJ Kuroda Sees Wider +0.2% to -0.2% 10-Year Yield

--Kuroda: Flexible Target Does Not Mean BOJ Raising Rates 

     TOKYO (MNI) - The Bank of Japan will allow a wider range of +0.2% to -0.2%

for the 10-year Japanese government bond yield, double the current unofficial

range of +0.1% to -0.1%, which should help recover the function of the tepid JGB

market and make large-scale monetary easing more sustainable.

     "Trading in the JGB market has shrunk and its function has been reduced. By

allowing a wider trading range, I think the market will regain some vitality,"

Kuroda told a news conference after a two-day policy meeting that ended at 1256

JST (0356 GMT) Tuesday.

     "But this does not mean that we are making an adjustment to the policy

stance or seeking to raise interest rates."

     He added that there is no need to further expand the 10-year yield trading

band in the near future.

     The BOJ's policy stance is unchanged: it will conduct additional easing if

necessary to guide below 1% inflation to a stable 2% and anchor it around that

level, he said.

     --OUTPUT GAP VS CPI

     Kuroda repeated his mantra that there is no quick fix for the slow pickup

in consumer prices in Japan, and that the BOJ must maintain monetary easing

persistently.

     From the macro-economic viewpoint, a continued positive output gap --

firmer demand and tighter supply -- should eventually push up wages and prices

strong enough to drive the annual inflation rate to the BOJ's 2% price stability

target, he predicted.

     The governor stressed his initial short-term goal of hitting the 2% target

in about two years from April 2013 by injecting massive cash into the financial

system "was not a mistake" because the failure to do so was caused by two main

unexpected events -- wage growth was too slow to spur consumer spending and

crude oil prices plunged.

     --FLEXIBLE TARGET, PURCHASES

     The BOJ board decided Tuesday in a 7-to-2 vote to make its long-term

interest rate target and asset purchases more "flexible," allowing the nearly

flat Japanese government bond yield to steepen slightly in line with firmer

growth and inflation.

     This will also help recover some functions of the tepid JGB market while

keeping the stimulative effects of large-scale monetary easing.

     The BOJ's move is also aimed at reducing the side-effects of prolonged

aggressive easing, which has been in place since April 2013. Negative to zero

interest rates are squeezing profit margins for lenders and hurting pension fund

investments in bonds.

     The BOJ adopted "forward guidance" for the policy rates to show that it is

"strengthening its commitment" to guiding low inflation to its stable 2% target.

This should help the bank "persistently continue" aggressive monetary easing as

the stubborn deflationary mindset lingers among businesses and households.

     "Today's decision doesn't mean that we are moving toward an exit (from

easing)," Kuroda said. The tweaked policy stance "clearly denies the notion that

it amounts to a rate hike."

     --LOWER CPI OUTLOOK

     In the face of a slow pickup in consumer prices, the BOJ board also revised

down its medium-term inflation projection, as widely expected, repeating that

downside risk to inflation are higher than upside risks.

     In the bank's quarterly Outlook Report, the median forecast for the core

CPI (excluding fresh food) by the nine-member board was revised down to +1.1%

for fiscal 2018 from +1.3% projected in April.

     The median inflation forecast for fiscal 2019 was also revised down to

+1.5% from +1.8% made in April and that for fiscal 2020 was lowered to +1.6%

from +1.8%. The forecast excludes the direct impact of a sales tax hike to 10%

from 8% planned in October 2019.

--MNI Tokyo Bureau; tel: +81 90-2175-0040; email: hiroshi.inoue@marketnews.com

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

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