Japan: BoJ launches new monetary policy focus
September 21, 2016
The Bank of Japan (BoJ) decided to sail further into unchartered territory at its 20–21 September monetary policy meeting by setting a target for government bond yields and introducing an inflation-overshooting commitment. The Bank voted 7–2 to apply an interest rate of minus 0.1% to the Policy-Rate Balances in current accounts held by financial institutions. In the same vote, the BoJ announced that it will purchase Japanese government bonds (JGB) in an attempt to keep 10-year JGB yields at the current level of around 0%. The Bank abolished the guideline on the average remaining maturity of 7–12 years and the maturity range it would make purchases within. Moreover, the Bank stated that JGB purchases will fluctuate at around the current annual amount of JPY 80 trillion (approximately USD 788 billion). Additionally, the BoJ introduced two new tools for market operations to control the yield curve: fixed-rate purchase operations and fixed-rate funds-supplying operations for a period of up to 10 years.
While the Bank voted 7–2 to maintain its annual acquisitions of exchange-traded funds (ETFs) at JPY 6.0 trillion, it decided to allocate more funds to Topix ETFs. Previously, most of the purchases were focused on funds that track the Nikkei 225, which, according to some analysts, had greatly distorted the stock market.
The renamed Quantitative and Qualitative Monetary Easing (QQE) with yield-curve control program aims at achieving “the price stability target of 2%, as long as it is necessary for maintaining that target in a stable manner.” However, instead of targeting the pace of increase of the monetary base, the Bank committed to expanding the monetary base until core inflation exceeds the price stability target. The Bank also dropped the previous time frame of two years.
The Bank introduced this new focus following its comprehensive assessment of monetary easing announced in July. The BoJ acknowledged that despite ending with long-lasting deflation, the inflation target of 2% has not been met mostly due to a series of exogenous factors: the decline in crude prices, weak domestic demand following the introduction of a consumption tax hike in April 2014, the slowdown in emerging economies and heightened volatility in global financial markets. Against this backdrop, the Bank decided to use this new approach in order to rise inflation expectations. The “yield curve control” is expected to bring down real interest rates by steepening the difference between short- and long-term yields and fanning inflationary pressures. Moreover, the Bank declared that it is ready to ease monetary policy further by cutting the short- and long-term key benchmark rates, expanding asset purchases and accelerating the expansion of the monetary base.
Importantly, in the final policy statement, the BoJ stressed that the Bank and the government should work in close coordination to boost the Abenomics economic program of monetary easing, fiscal stimulus and structural reforms. The next monetary policy meeting is scheduled for 20–21 September.