Daily Times

As the clock counts down to the Bank of Japan’s July 31 policy announcement, officials are looking for ways to keep their stimulus program sustainable while reducing the harm it causes in markets and on the profitability of commercial banks.

A series of recent media reports suggest that the gathering could deliver anything from allowing for a more natural rise in long-term interest rates to no change and a mere assurance that policy makers are considering the side effects. The speculation fueled a slide in 10-year Japanese government bond futures during U.S. trading on Friday, setting the scene for JGB yields to move higher in Tokyo on Monday.

Bloomberg’s reporting indicates that officials are focused on coming up with adjustments to mitigate harm without doing anything resembling a move to policy normalization. At this stage, there’s little likelihood of a significant change on July 31 to yield-curve control or asset-purchase settings, said officials involved in discussions, who asked not to be identified because the talks are private. Some officials said there’s no fundamental solution to side effects hurting commercial banks.

The dilemma for Governor Haruhiko Kuroda is that even as cries to change policy grow louder, persistently weak inflation dictates the need to maintain stimulus. Winding it back would strengthen the yen, further undermining efforts to spur higher prices, while also hitting Japanese exporters.

Kuroda’s Response

Kuroda stuck to his standard playbook on Saturday, declining to comment on the speculation.

“I know absolutely nothing about the basis for those reports,” Kuroda said in Buenos Aires, where he is attending the meeting of finance ministers and central bank governors of the world’s leading 20 economies.

It would be inappropriate to make remarks on the subject given the proximity of the BOJ meeting, he said, adding that any policy decision will require sufficient discussion about prices and the state of the economy.

According to a report from Reuters, ideas to mitigate policy harm include tweaking the yield-curve control program to allow for a more natural rise in long-term interest rates, and operational changes to the way the BOJ buys JGBs and exchange-traded funds. The report said discussions were preliminary and outcomes would be dependent on updated inflation forecasts from board members.

Media Reports

The Asahi newspaper said measures including yield-curve control would be debated during the two-day gathering concluding July 31 but that the board wouldn’t reach any decision on what to do then.

Japan’s latest consumer price data released on Friday showed the core index inching higher to 0.8 percent. That leaves it at less than half the 2 percent target that Kuroda is aiming for. Stripping out both fresh food and energy costs, prices rose only 0.2 percent in June from a year earlier.

Key elements of the BOJ’s stimulus program, which hasn’t changed since the adoption of yield-curve control in 2016, include:

Negative interest rate of minus 0.1 percent charged on some of the money financial institutions keep at the BOJ.

Yield target of about 0 percent for 10-year Japanese government bonds.

Guideline for the BOJ’s JGB holdings to increase by about 80 trillion yen a year. (In reality, it’s dropped well below this.)

Purchasing ETFs so holdings rise by 6 trillion yen a year, and buying Japanese real estate investment trusts to raise these holdings by 90 billion yen annually.

Published in Daily Times, July 23^rd 2018.