BoJ signals end to easy-money policy

The Bank of Japan’s surprise decision to loosen the grip on its yield cap marks the beginning of an end to governor Haruhiko Kuroda’s controversial policy, and may pave the way for massive monetary stimulus to be phased out next year.

The central bank last Tuesday tweaked its bond yield control in a way that effectively allows long-term interest rates to rise more, shocking investors who weren’t expecting any such changes until Kuroda steps down in April next year.

The pressure for the BoJ to act came from the government’s desire for more flexible monetary policy, prospects for higher wage growth and inflation and risks of a US recession next year, say sources familiar with the bank’s thinking.

How far the BoJ now goes depends on whether Japan’s economy can withstand headwinds from slowing global growth and if wages will perk up enough to support consumption, they say.

“The government’s view is that the BoJ should move nimbly and flexibly,” said an official with direct knowledge, referring to how the BoJ’s consistent dovish tone had caused sharp falls in the yen that hit households via higher import costs.

While Kuroda explained the move as extending the lifespan of yield curve control (YCC), it underscored the central bank’s resolve to gradually shift away from his radical policy ahead of a leadership transition next year.

“Under a new governor, the BoJ could move further toward normalising policy and making its monetary framework more flexible,” said former BoJ board member Takahide Kiuchi, an economist at Nomura Research Institute. “Whether it can actually abandon negative rates or yield curve control next year will depend much on economic and financial conditions at the time.”

The BoJ’s relentless defence of its 0.25% cap on the 10-year bond yield had forced the central bank to ramp up bond buying, shrunk market liquidity and distorted market pricing — strains that had become hard to ignore, the sources say.

By lifting the cap to 0.50%, the BoJ dealt with the immediate market stress and bought itself time to work out when it should start phasing out YCC, they say. Waiting until next year would have forced it to combat intensifying market speculation.

“The BoJ cleared one threshold toward phasing out stimulus,” said one of the sources. “When uncertainty is so high over the outlook for US monetary policy, it probably wants to have a free hand on when next to act.”