MNI INSIGHT: Current 10-Yr Band Seen Sufficient For BOJ

Some Bank of Japan officials favour retaining the current trading band for the benchmark 10-year yield as they feel the range is sufficient to add limited volatility to the rate, although it's unclear whether the Board itself is divided on whether or not to widen the range, MNI understands.

The BOJ is studying tools that can be used to inject some volatility within the framework of the yield curve control policy. The central bank currently buys JGBs so that the 10-year bond yield remains "at around zero percent" although it tolerates movement in a range of -0.2% to +0.2%. But there is general acceptance that it is desirable for yields to be able to move in a wider range at times in response to overseas bond movements or a change in economic and price views.

However, while some upward traction in longer rates will aid bond market functioning, officials feel a wider range could lead to excess volatility, which will put downward pressure on the economy and limit the effectiveness of easy policy.

The BOJ may clarify how the bank sees rate movements in its March policy report.

ETFs

The Bank of Japan is also examining its policy of buying exchange-traded funds, including by gauging its effectiveness at various times, with the goal of maximizing its impact.

Overall, the BOJ believes buying ETFs is an effective and useful tool to help underpin risk premia when the main Nikkei stock index is at a low level, but the impact is diminished when share prices are relatively high.