Japan turns to targeting interest rates
BOJ sidelines massive money printing that did little to jolt its economy
JAPAN overhauled its monetary policy framework yesterday, switching to targeting interest rates and sidelining more than three years of massive money printing that did little to jolt the economy out of a decades-long funk.
But the Bank of Japan (BOJ) held off on deepening negative interest rates or expanding its asset purchase target, saying the modification was aimed at resetting its stimulus programme for a protracted battle to hit and then keep to its 2 percent inflation goal.
Japanese stocks rose and the yen fell on hopes that the BOJ’s decision to reset its stimulus programme would ease pressure on the country’s banks and insurers, although some analysts doubted whether the move would have a lasting positive impact on financial markets.
“The impression is that the BOJ is starting to pull back some of its troops from the battlefront,” said Katsutoshi Inadome, a senior fixed income strategist at Mitsubishi UFJ Morgan Stanley Securities. “The markets could now begin testing the BOJ’s commitment to its price target.”
BOJ’s governor Haruhiko Kuroda said targeting interest rates could work effectively to raise inflation expectations than focussing on base money.
Policy framework “It’s very effective in the longterm perspective. But in the short term, there isn’t a clear link between the base money target and inflation expectations,” Kuroda told a news with the central bank.
Under the new framework that adds yield curve control to its current quantitative and qualitative easing regime, the BOJ could deepen negative rates, lower the long-term rate target, or expand base money if it were to ease again, the central bank said when announcing the policy decision.
“The BOJ will seek to lower real interest rates by controlling short-term and long-term interest rates, which would be placed at the core of the new policy framework.” – Reuters