MNI INSIGHT: Slower Economy To Dent BOJ Policy Tweak Plans

The continued state of emergency in Japan is making it difficult for the Bank of Japan to take advantage of market conditions and ease longer-term JGB yields higher in an attempt to gain ammunition for future policy challenges, MNI understands.

The BOJ isn't looking to tighten policy but rather to widen the trading band in the 10-year JGB yield which would improve its flexibility to respond to changes in the economy and hopefully allow the longer-end of the curve to steepen. That would give the central bank greater ammunition if needed to again target lower long-term rates, whilst also helping improve the profitability of some banks.

However, the continued restrictions on the economy and the delay to the recovery mean easy policy will have to stay as the 2% price target seems a long way off. While the board's outlook in December was for a tough Q1, economic conditions triggered by rising Covid-infections, a second state of emergency and the suspension of the Go To Travel campaign have been worse than feared.

FURTHER WAIT

The bank was hoping to use the current policy review as an opportunity to change the band without sending a policy message based on the moderate economic recovery built on solid exports and manufacturing strength at home and abroad.

For now, the BOJ will look to boost the sustainability of current monetary policy during normal times, whilst being able to quickly respond to changes in economic activity and prices as well as financial conditions.

"The BOJ will adopt a forward-looking perspective of how to achieve stability in economic activity and prices by pursuing further effective monetary easing while mitigating side effects," BOJ Governor Haruhiko Kuroda said late in December.