Bank of Japan money target up for debate in policy review

TOKYO: The Bank of Japan’s ( BOJ) policy review could put up for debate its target for expanding base money through massive asset purchases, sources say, but the challenge would be to avoid spooking bond markets used to years of unprecedented buying.

The BOJ’s announcement last month of a thorough review of its policy and its effects triggered a sharp bond sell- off as investors feared the central bank, wary of its dwindling policy tools, might lean toward reducing its government bond purchases.

It is currently buying roughly 110-120 trillion yen in bonds each year to meet its pledge to expand base money - or cash and deposits in circulation - by an annual 80 trillion yen ( US$ 790 billion).

But after initial successes in the asset-buying programme, which is aimed at ending two decades of deflationary pressure, prices are falling again.

Sources told Reuters last week that the BOJ had already prepared an outline of the review that will maintain its pledge to hit two per cent inflation as soon as possible.

That suggested that the most likely outcome of the review might be modest fine-tuning of its “quantitative and qualitative easing” (QQE) programme, which combines buying bonds and riskier assets with negative interest rates.

Tweaks might include changing the average duration of bonds the BOJ holds, currently between seven and 12 years, so that the central bank has more flexibility over which bonds to buy when assessing market supply and demand.

But sources familiar with the BOJ’s thinking say a more radical makeover of the programme isn’t off the table.

One option could be to shift its target from base money to longterm interest rates, which would relieve the BOJ from the pressure to keep up the current level of bond buying, which could soon exhaust the available supply.

“The BOJ is now in a war of attrition, which means it needs to try and extend the lifespan of QQE,” said one source. “Reconsidering the base money target could be one solution.”

The idea of reviewing the base money target, floated by several former BOJ executives, has gained support from some in the central bank who have grown doubtful on whether more money printing will help hit two per cent inflation, the sources said.

“If the BOJ’s main goal is to push down long-term rates, one feasible idea is to set an interest rate cap. The BOJ already holds enormous amounts of government bonds, so it can probably keep yields low without buying too much further,” said Hideo Hayakawa, a former top BOJ economist who is well versed in the bank’s policy.

“This may be the better option, particularly for a country like Japan, which has a huge fiscal deficit,” said Hayakawa, whose views are closely followed by incumbent policymakers.

To be clear, there is no consensus yet on how the comprehensive review could affect the direction of monetary policy. It is also uncertain whether this will emerge as a strong option as debate on the review heats up. — Reuters