BOJ’s Kuroda signals targeting longer-dated bonds

TOKYO, Mar 26:  Bank of Japan Governor Haruhiko Kuroda said the central bank will seek to push down market interest rates by purchasing longer-dated government bonds, underscoring its resolve to expand its balance sheet more aggressively to beat deflation.
Kuroda said among future policy options for the BOJ would be to extend the maturity of the government bonds it buys under its asset-buying programme, its key monetary easing tool, to five years from the current three years.
He also said there may be room to boost purchases of riskier assets, although the BOJ’s nine-member board will make the final decision at next week’s policy-setting  meeting.
‘We will scrutinise what would be the most effective step, aiming to make full use of the BOJ’s capacities,’ Kuroda told parliament on Tuesday in semi-annual testimony on the BOJ’s monetary policy and assessment of the economy.
His remarks pushed the 10-year government bond yield to a near-decade low of 0.525 percent on expectations the BOJ will buy bonds more aggressively.
Sources familiar with central bank thinking say the BOJ is expected to ease its already ultra-loose policy and debate an overhaul of its policy framework at its next scheduled meeting on April 3-4.
Prime Minister Shinzo Abe has charged Kuroda, who took over as governor last week, with pursuing bolder, unorthodox policies to finally stamp out the deflation that the central bank has struggled to tame for years.
Expectations that he will steer the BOJ toward more aggressive steps to beat deflation have prompted investors to sell the yen, helping push the dollar up to a 3-1/2 year high of 96.71 yen earlier this month.
Kuroda reiterated the BOJ’s resolve to do whatever it takes to achieve its 2 percent inflation target but stressed that expanding base money — or cash and reserves at the central bank — alone is not enough.
‘Quantitative easing has a certain effect (on the economy) but we shouldn’t rely on that effect alone,’ he said, stressing the need to target assets that would be most effective in pushing down borrowing costs and risk premiums.
‘The BOJ will seek to expand its balance sheet by purchasing longer-dated assets. It will diversify its asset purchases to push down yields across the curve,’ he said.
Kuroda, former head of the Asian Development Bank, said the central bank should focus on the total balance of its asset holdings, or the stock, rather than the amount of its asset purchases each month, to gauge the effect of monetary  easing.
‘How the stock moves is key in trying to push down the yield curve,’ he said, adding that the BOJ can boost the size of its asset holdings more efficiently by buying longer-dated assets.
Even before Kuroda’s appointment, the BOJ had pledged to pump 101 trillion yen ($1 trillion) into markets via its asset-buying and lending programme by the end of this year and to adopt open-ended purchases from next year.
Under its current programme, the BOJ limits the duration of bonds it buys to three years as it wants to push down the cost of borrowing for companies, many of whom work in three-year investment cycles.
It buys long-term government bonds, including those with durations longer than three years, to offer longer-term funds as part of regular market operations. The purchases are not considered part of monetary policy.
The BOJ has been reluctant to buy longer-term government bonds for monetary easing out of concern it could bind its hands for longer than it wants and so make a future exit from ultra-loose policy difficult.
Kuroda, however, said combining the two programmes, an idea floated by a few board members in February, was worth  studying.
He also signalled the BOJ should consider scrapping its self-imposed rule of capping the size of its bond holdings at the equivalent of bank notes in circulation.
Critics doubt Kuroda can meet his pledge of achieving 2 percent inflation in two years since years of ultra-easy policy has failed to end deflation.
Cash and reserves held by commercial banks are set to reach 170 trillion yen by December, up 29 percent from a year earlier, BOJ predictions show.
That represents roughly 36 percent of Japan’s nominal GDP, more than 17 percent for the U.S. Federal Reserve and 16 percent for the European Central Bank, the BOJ estimates show. Still, BOJ and private-sector analysts expect Japan’s core consumer inflation to barely exceed 1 percent for another two years.
($1 = 94.34 yen)
(AGENCIES)

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