BOJ is said to be wary of yield target hike even if CPI hits 1%

[TOKYO] Bank of Japan officials would rather be late than early in raising their 10-year bond yield target from zero per cent, even if consumer price gains reach one per cent later this year, according to people familiar with the central bank's discussions.

Officials see considerable risks in moving too quickly and are mindful of policy exits in 2000 and 2006, said the people, who asked not to be named because the talks are private. These exits were criticised for coming too soon and prolonging deflation. BOJ officials would want to first confirm that the underlying inflation trend is improving and view it as important to look beyond the impact of higher oil prices and a weaker yen, which have the potential to change quickly.

With the currency and rising energy costs showing signs of spurring inflation in Japan, economists at BNP Paribas SA and Barclays Plc are among those tipping that the BOJ will pin its 10-yield target higher later this year. JPMorgan Chase & Co also sees the chance of a move.

The 10-year target, the BOJ's long-term policy rate, is the current focus of attention. Changes to this could also affect the central bank's short-term policy rate, which is now minus 0.1 per cent and anchors the interest-rate curve it's seeking to manage.

Governor Haruhiko Kuroda and his board gather for a two-day meeting Jan 30-31, when they will consider any changes to policy and also provide updated forecasts for inflation and gross domestic product growth.

Some BOJ officials think the central bank could raise its outlook for economic growth after revisions to the way the government calculates GDP data. The inflation outlook may be kept unchanged or increased slightly, said the people with knowledge of the discussions.

Mr Kuroda said in Davos, Switzerland, last week that he expects GDP growth around 1.5 per cent for the fiscal year starting in April, higher than 1.3 per cent the BOJ forecast three months ago. The BOJ in its November outlook projected inflation of 1.5 per cent for the same period.

Core consumer prices, the BOJ's benchmark gauge, fell 0.4 per cent in November. Figures for December will be released on Jan 27.

Ryutaro Kono, chief economist at BNP Paribas, wrote in a Jan 13 report that the BOJ will probably raise the long-term policy rate in October because of an increasing divergence with US yields, which could weaken the yen too much and hurt households.

BOJ officials are fairly confident they can keep the yields on 10-year Japanese government bonds around zero per cent, even if CPI moves to around one per cent. The more bonds the BOJ holds, the easier it gets for the central bank to influence the price, the people said.

The 10-year yield was about 0.045 per cent at 5.30pm in Tokyo on Tuesday, versus 2.408 per cent for US 10-year Treasuries. The yen traded at 113.30 to the US dollar. It's weakened about 13 per cent from its 2016 intraday high set in June.

In 2000, the BOJ ended its zero interest rate policy even as the government publicly tried to stop it. Several months later, the central bank had to change course by introducing a quantitative easing program. The BOJ moved to exit this program in 2006, even as inflation was around zero per cent, reinforcing a view that it wasn't willing to do enough to fight deflation and opening the door for years of political criticism.

BLOOMBERG