BOJ signals readiness to ease monetary policy

Bank of Japan (BOJ) Governor Haruhiko Kuroda signaled his readiness to ease monetary policy further using existing or new tools, shrugging off growing market concerns that the bank is reaching its limits after an already massive stimulus program.

He also stressed the BOJ’s comprehensive assessment of its policies later this month won’t lead to a withdrawal of easing.

But Kuroda acknowledged that the BOJ’s negative interest rate policy may impair financial intermediation and hurt public confidence in Japan’s banking system, a sign the central bank is becoming more mindful of the rising cost of its stimulus.

“Even within the current framework, there is ample room for further monetary easing ... and other new ideas should not be off the table,” Kuroda told a seminar yesterday.

“There may be a situation where drastic measures are warranted even though they could entail costs,” he said, adding that the BOJ should “always prepare policy options.”

Under its current framework that combines negative rates with hefty buying of government bonds and some riskier assets, the BOJ has gobbled up a third of Japan’s bond market and faced criticism from banks for squeezing already thin profit margins.

Sources have told Reuters the BOJ will consider making some modifications to its policy framework and debate some of the unintended consequences of its ultraloose policy.

For the first time, Kuroda publicly acknowledged that negative rates could dampen public sentiment by hurting banks’ profits and the rate of returns on pension investments.

But he said monetary policy has yet to reach its limit, stressing that the BOJ had room to deepen negative rates.

“There is no free lunch for any policy. That said, we should not hesitate to go ahead with (additional easing) as long as it is necessary for Japan’s economy as a whole.”

The BOJ eased policy in July and pledged to conduct a comprehensive assessment of the effects of its stimulus program at this month’s rate review.