BOJ to loosen grip on yields, lay groundwork for 'stealth' tapering

TOKYO (Reuters) – The Bank of Japan will unveil on Friday a raft of measures to loosen control over asset price moves and make its ultra-easy policy more sustainable, as the economic damage wrought by the coronavirus pandemic prolongs its battle to fire up inflation.

FILE PHOTO: A man wearing a protective mask walks past the headquarters of Bank of Japan amid the coronavirus disease (COVID-19) outbreak in Tokyo, Japan, May 22, 2020.REUTERS/Kim Kyung-Hoon/File Photo

The outcome of the policy review, to be announced after a two-day meeting ending on Friday, will be more a fine-tuning of the BOJ’s tools rather than on overhaul of its strategy that has failed to accelerate consumer price growth to its 2% target.

By allowing bond yields to fluctuate more around its target, the BOJ is hoping to avoid the hassle of having to contain any natural rise in yields caused by prospects of a stronger recovery from the pandemic later this year, some analysts say.

Rallying stock prices also give the BOJ a rare chance to “stealth” taper its huge purchases of exchange-traded funds (ETF), a practice that is drawing increased criticism for distorting market pricing.

After ramping up buying last year to calm markets jolted by the pandemic, the BOJ has sharply reduced its ETF purchases recently. It hopes to keep tapering smoothly by phasing out a numerical target set for its ETF-buying programme.

“The BOJ probably wants to prepare for a post-COVID world, where strong U.S. growth and rising Treasury yields may push up growth and yields in Japan,” said former BOJ official Nobuyasu Atago, who is now chief economist at Ichiyoshi Securities.

“If so, the bank may drop hints at the review that it will tolerate further rises in yields in the long run,” he said.

The BOJ’s review comes in the wake of bullish projections by the Federal Reserve that has fuelled hopes that strong U.S. growth will spur momentum in laggards like Japan.

Markets expect the BOJ to make no changes to its yield curve control (YCC) targets, set at -0.1% for short-term rates and 0% for 10-year bond yields.

In the review of its tools, the BOJ will likely phase out a numerical target for its ETF buying so it can slow purchases when stocks are booming, sources have told Reuters.

The central bank will also allow long-term rates to fluctuate more around its 0% target to breathe life back to a market made dormant by its dominance, they said.

The Nikkei newspaper reported the BOJ may widen the implicit band set around its target.

The challenge for the BOJ would be to let market forces drive prices more, without causing a spike in yields or giving the impression it is dialing back stimulus, analysts say.

“The bigger problem with this review is that whatever tweaks the BOJ makes probably won’t change the fact inflation will remain distant from its 2% target,” said Izuru Kato, chief economist at Totan Research.

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