MNI POLICY: BOJ To Make 10-Year JGB Yield Target Flexible

     TOKYO (MNI) - The Bank of Japan 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 key points from the BOJ board decision after the latest two-day policy

meeting that ended on Tuesday:

     -- Under the yield curve control framework adopted in September 2016, the

BOJ will keep the target for the overnight interest rate at -0.1%.

     -- The BOJ will continue buying JGBs to stabilize the 10-year yield "around

zero percent" (the same as before) but it will also allow the long-term interest

rate to "move upward and downward to some extend" in line with the changes in

economic growth and inflation.

     -- Officially, the BOJ will maintain the annual pace of its JGB purchases

at around Y80 trillion, although the pace has declined sharply as the

accumulated effects of keeping rates down with asset purchases have intensified.

The bank noted it will conduct the purchases "in a flexible manner."

     -- 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.

     -- On forward guidance, board member Yutaka Harada, a former government

economist, dissented, arguing that it would be better to adopt one that would

"further clarify its relationship" with the inflation target. Goushi Kataoka, a

former private-sector economist, was also opposed. He repeated his opinion that

it would be better to promise additional easing in the event of a downward

revision to the board's longer-term inflation outlook.

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

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