REPEAT: MNI: If Needed, Difficult For BOJ To Widen JGB Target

Repeats Story Initially Transmitted at 07:15 GMT Dec 18/02:15 EST Dec 18

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By Hiroshi Inoue

     TOKYO (MNI) - It will be difficult for the Bank of Japan to widen the

trading band range for benchmark 10-year JGB yield, officials feel, unless the

BOJ changes its target rate from around 0%, MNI understands.

     If in the future the economy slows, officials are concerned that the BOJ

cannot alter the trading band around the current target as it wouldn't fit with

its own mechanisms for altering the policy rate.

     Under the BOJ's current framework, they are attempting to stabilize the

10-year government bond yield, the benchmark for long-term borrowing costs, at

around zero percent and keep the overnight interest rate at -0.1%. Since July,

they have had a strengthened policy framework, giving them a band around that 0%

target of -0.2% to +0.2%, in which they aim to keep the 10-year yield.

     --DEVIATES FROM ZERO

     Historically, the Bank of Japan has changed policy rates in degrees of

25bps or smaller. Moving the 10-year trading band to + or - 0.3 bps either side

of 0% would effectively equate in size to greater than a rate move in either

direction, one person familiar with BOJ thinking alluded.

     The BOJ has moved the policy unsecured overnight call rate by less than 25

bps in the last decade, starting with a 20bps cut in October 2008.

     --WEAKER ECONOMY WORRY

     The BOJ will be able to cope with a slight economic slowdown under the

current policy framework as the BOJ will tolerate a fall in the 10-year JGB

yield to -0.2% or slightly lower.

     However, if the BOJ faced serious economic downturn, the bank would

consider lowering the 10-year target rate from around 0% and lowering the

short-term interest rate from -0.1%. That would give greater downside

flexibility of the trading range without altering the symmetric target.

     --NEGATIVE RATES

     BOJ officials have admitted the negative interest rate has been effective

in curbing the yen's rise. However, they have learned lessons over side-effects

of the negative interest rate policy introducing the yield curve control policy

to mitigate side-effects.

     A further lowering of negative interest rates will further squeeze banks'

margins on loans, putting downward pressure on returns from fund investment at

life insurance firms and pension funds.

     The BOJ could still consider lowering the negative rate if an economic

crisis appeared on the horizon, as the bank must prevent the economy from

falling into recession, which in turn will worsen the stability of financial

system.

     Alternatively, the BOJ could explore further options, including perhaps

changing the policy framework to include strengthening the forward guidance for

monetary policy.

--MNI Tokyo Bureau; tel: +81 90-2175-0040; email: hiroshi.inoue@marketnews.com

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com