MNI STATE OF PLAY: BOJ Adds Greater Flexibility To Asset Buys

The Bank of Japan has added both greater flexibility and clarity to its asset purchase programmes while leaving its main policy settings unchanged at the March policy meeting.

Outlining the outcome of the meeting and the summary of the strategy review announced late in 2020, the BOJ offered no radical shifts in policy, rather offering a string of tweaks rather than radical changes that neither tighten or loosen overall monetary accommodation, in line with comments from former officials to MNI.

Policymakers left the short-term policy interest rate unchanged at -0.1% and the long-term policy interest rate target unchanged at around zero percent. But the bank decided to widen the tolerance band for the 10-year JGB to "around plus and minus 0.25 percent from the target level", despite recent comments from Governor Haruhiko Kuroda to legislators appearing to rule out such a move. It also committed the tolerance band into the Bank's policy statement for a first time.

Perhaps in a nod to recent turbulence in global bond markets, the BOJ said it will introduce the opportunity for "fixed-rate purchase operations on consecutive days which would act "as a powerful tool to set an upper limit on interest rates when necessary."

The bank still remains concerned over an excessive drop in longer-end JGB yields that could have implications for the future sustainability of financial activity functions in a broad sense, noting that the effects "on economic activity and prices are relatively large for short- and medium-term interest rates."

There was no elaboration on how it would prevent a sharp fall in these bond yields, despite speculation that the BOJ may reduce the scale of its longer-end bond purchases.

FUTURE POLICY

On future policy action, the BOJ confirmed that lowering both short- and long-term interest rates remain options if needed and the bank would mitigate any unfavorable impact of lower negative interest rates on banks' profitability through subsidies. In part, the BOJ said this could be addressed by introducing a new scheme to mitigate the unfavourable impacts.

"Cutting short- and long-term interest rates is an important option as a nimble and effective additional easing measure. It is appropriate to cut those rates while considering the impact on the functioning of financial intermediation," the BOJ said.

Tweaks to the BOJ's programme of exchange traded funds (ETF) saw a removal of the phrase that buys would be made "at an annual pace of JPY6 trillion", although policymakers said they will maintain buying ETFs and J-REITs even after Covid-19 subsides.

"The BOJ will purchase ETFs and Japan real estate investment trusts as necessary with upper limits of about JPY12 trillion and about JPY180 billion, respectively, on the annual pace of increase in their amounts outstanding," the bank said. "

The BOJ also increased the scale of purchases of commercial paper and corporate bonds to JPY20 trillion from JPY15 trillion until the end of September.