MNI STATE OF PLAY: BOJ Seeking To Reduce Easing Side-Effects

--BOJ Rate Hike Unlikely Now; Board Eyes Sustainable Policy  

By Hiroshi Inoue

     TOKYO (MNI) - The Bank of Japan is unlikely to raise interest rates anytime

soon amid slow inflation and concerns about the drag from U.S. trade rows on

global growth, but the BOJ board is expected to discuss ways to reduce the

side-effects of prolonged large-scale monetary easing at its July 30-31 meeting,

MNI understands.

     The board is expected to maintain the policy target under the yield curve

control framework while revising down its median projections for the core CPI

(excluding fresh food) from its July forecasts of 1.3% for fiscal 2018, 1.8% for

fiscal 2019, and possibly 1.8% for fiscal 2020.

     BOJ board members have been saying it will take time before the bank can

achieve its 2% inflation target, and that they must watch both the costs and

benefits of large-scale stimulus.

     The process of making the BOJ's massive asset purchases more flexible began

in September 2016, when it shifted its policy target to the shape of the bond

yield curve from the total sum of cash injected into the financial system. The

pace of the BOJ's purchases of Japanese government bonds from banks has declined

sharply from Y80 trillion a year.

     While no drastic policy change is expected, the central bank can tweak its

market operations and lay the groundwork for scaling back the degree of

aggressive easing that was launched in April 2013 to make the policy framework

more sustainable and head off excessive investment and a further squeezing of

profit margins for lenders.

     Following board discussion next week, Governor Haruhiko Kuroda may ask BOJ

staff to come up with ideas, by the Sept.18-19 policy meeting, that can help

ease the low profitability of regional banks and zero returns on bond

investments by pension managers while maintaining the stimulative effects of

easing.

     Whatever the board decides, it is unlikely to conduct "less accommodative"

measures at least until the year-on-year rise in the core CPI goes well beyond

the halfway point of 1%, and the uncertainty over global growth eases.

     The BOJ will emphasize that any new measures would not be an exit strategy

or normalization.

     --YEN RISE RISK

     BOJ officials are also sensitive to when to release and how to describe new

ideas. The BOJ doesn't want to trigger a yen rise with a hint of a future

tightening as it would dampen stock prices and sentiment, undermining its

efforts to achieve stable 2% inflation.

     The BOJ is expected to blame persistent structural factors, including

productivity gains, for consumer prices' slow response to the improving output

gap and tightening labor supply, in a statement due out after the meeting next

week.

     "The board will review its growth and inflation outlook based on the

analysis of slow price rises, and consider appropriate monetary policy to be

conducted for a prolonged period," a person who is familiar with BOJ thinking

said.

     --YIELD TARGET RANGE

     Among possible tools to increase the flexibility of easing is to change the

10-year yield target to a range from "around zero percent."

     The BOJ has not published its internal market operation target but it is

believed to be allowing the 10-year JGB yield to move between -0.1% and +0.1%.

     Another person who is also familiar with BOJ thinking said if the BOJ

decided to allow the 10-year yield to move more widely, it would help recover

some functioning of the bond market.

     However, he added, it would not be a quick fix for the structural problems

facing regional banks -- there are fewer firms and individuals they can lend

amid the falling population and there is a slow progress in finding new demands.

--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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