[TOKYO] Bank of Japan officials are quietly discussing which interest rate to use as a benchmark once the central bank reverts to using rates as its main monetary policy tool, rather than the current strategy based on printing money.
According to sources familiar with the BOJ's internal discussions, one idea that has been floated is to use "repo"rates - the rates financial institutions use to exchange cash and securities for a set period of time - as the main policy tool instead of the conventional overnight call rate.
On Thursday, the BOJ went a step further by exchanging opinions with market participants on the securities repurchase market, or repo market. The central bank has not disclosed what was discussed at the forum.
To be sure, the BOJ is nowhere near abandoning its"quantitative and qualitative easing" (QQE) policy that targets base money, or the amount of cash it pumps out to markets.
When the time comes to consider an exit from QQE, however, the central bank will more fully consider reverting to a rate-based strategy.
With the BOJ already gobbling up a quarter of government bonds available in the market, some central bankers feel that reverting to a rate target could become an option if the bank runs into trouble buying bonds, the sources say.
Before adopting QQE in April 2013, the BOJ has traditionally used the uncollateralised, overnight call rate as its main policy tool, as is customary among major central banks.
Many commercial banks that have accounts with the BOJ use the call market for daily funding adjustments, making it an ideal market for the BOJ to guide interest rates.
But ongoing reforms in the "repo" market, more widely used by brokerage firms, are set to expand its size to 20-30 trillion yen (US$167-US$251 billion), according to BOJ estimates.
That far exceeds the 2-3 trillion yen traded in Japan's call market, prompting some central bankers to advocate using "repo"rates as a benchmark.
BOJ board member Takehiro Sato made that case on Wednesday, saying that an expanding repo market may bring structural changes to the money market and the BOJ's market operations. "The (BOJ) is greatly interested in the potential impact on the size of call and repo market, the diversity of participants, and the money flow," he said in a speech to financial experts.
There is no consensus yet on whether the sheer size of the"repo" market makes its rate better suited as a policy tool. Critics say the bigger the size of the market, the more difficult it will be for the BOJ to control rate moves.