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Ex-BOJ Kozu: Also Need Closer Communication With Markets
By Hiroshi Inoue 
     TOKYO (MNI) - The Bank of Japan should allow market interest rates to
fluctuate more widely without changing its target for the 10-year bond yield,
currently "around zero percent," in order to smoothly normalize prolonged
large-scale monetary easing, a former senior BOJ official said.
     "I have no idea when the BOJ will begin normalizing the easy policy but if
the BOJ tries to raise the 10-year yield target from around zero percent, it
will be criticized by the government," Takashi Kozu, president of the Ricoh
Institute of Sustainability and Business, told MNI in an interview on Tuesday.
     "It will also increase the volatility in interest rates and trigger a surge
in long-term rates," he said.
     The government benefits from prolonged super-low interest rates, which
keeps its debt-servicing costs low. Government leaders would be sensitive to
signs of tapering of monetary easing as they could dampen stock markets as well
as business and consumer sentiment.
     "The 10-year bond yield has been firmly contained by the BOJ under its
yield curve control framework. Should the BOJ loosen its grip on long-term
interest rates, the 10-year bond yield would surge, even if the BOJ said it was
not tightening," said Kozu, who was deputy director-general of the Financial
System and Bank Examination Department before leaving the BOJ in July 2010.
     BOJ officials do not discuss publicly, but they seem to be allowing the
10-year bond yield to move between -0.1% and +0.1%, which is considered to be
"around" zero percent.
     Kozu said this range is still too narrow for the money markets to regain
trading functions that will become necessary once the BOJ moves to raise the
target for long-term borrowing costs in line with firmer growth and inflation.
     He noted that the BOJ used to allow the overnight call loan rate -- its
policy target in the past -- to fluctuate more widely.
     In 2006, the BOJ switched the policy target to interest rates from the
amount of cash deposited at the central bank, seeking to keep the overnight call
loan rate at certain low levels but tacitly allowing the rate to fluctuate about
30 basis points either way. When the published target was zero percent, it could
move between +0.3% and -0.3%.
     Until the BOJ replaced the monetary base with yield curve control as the
key policy target in 2016, it didn't have a published target for the 10-year
bond yield because the consensus was that central banks could only control
short-term interest rates.
--MNI Tokyo Bureau; tel: +81 90-4670-5309; email:

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