[TOKYO] The Bank of Japan plans to make its controversial negative interest rate policy the centrepiece of future monetary easing, promising to weigh further cuts as expansions to asset buying near their limits, the Nikkei newspaper reported on Wednesday.
While sources have told Reuters the BOJ may make its massive government bond purchasing more flexible, the Nikkei said that in doing so the central bank will likely maintain its pledge to increase its holdings at an annual pace of 80 trillion yen (S$1.07 trillion).
The plan will be part of the BOJ's comprehensive assessment of its stimulus programme, which combines negative rates with a massive asset-buying programme, at next week's rate review.
Such changes would underscore a growing concern within the central bank over its dwindling policy options, with its aggressive bond purchases draining market liquidity and failing to accelerate inflation to its 2 per cent target.
Whether the BOJ will actually deepen negative rates next week will depend on yen moves and the board's debate on the state of the economy, the Nikkei said without citing sources.
By shifting its focus to negative rates, the BOJ will have more options to draw on in case an expected US interest rate hike comes later than forseen - strengthening the yen.
But analysts doubt whether deepening negative rates next week would ensure a lasting weakening of the yen.
"If the BOJ pushes rates to minus 0.3 per cent next week, that will probably leave it with just one more chance to cut rates and may reinforce views there won't be much room left to slash rates," said Masafumi Yamamoto, chief bond strategist at Mizuho Securities.
"It's also uncertain whether the BOJ can dispel market concerns that its bond buying is reaching its limits."
At next week's review, the BOJ is likely to maintain its pledge to hit its 2 per cent inflation target "at the earliest date possible," say sources familiar with its thinking.
But with more than three years having passed since deploying its huge asset-buying programme, the central bank will abandon the two-year timeframe it set for achieving the goal, they said.
BOJ officials no longer mention the two-year timeframe in their speeches and it is not included in its policy announcements. But the deadline has not been officially ditched either, blamed by critics for forcing the BOJ to come up with overly optimistic inflation forecasts.
The BOJ added negative rates to its asset-buying programme in February in a renewed effort to push up prices. But the move has failed to address unwelcome yen rises and drew criticism from financial institutions for squeezing already thin margins.
BOJ officials have also become increasingly wary of the costs of negative rates, which have flattened the yield curve more than they had expected and raised concerns that it would impair financial intermediation.
Sources have told Reuters that the BOJ is studying several options to steepen the bond yield curve, including ways to cut short- to medium-term bond yields while pushing up super-long yields from undesirably low levels.
The BOJ may consider reducing purchases of government bonds with maturities longer than 25 years to push up super-long yields and give financial institutions a better environment for earning returns, the Nikkei said.
Purchases of shorter-term bonds could be increased to compensate, as some claim overall buying should be kept at the current pace, the paper said.