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Bank of Japan says no fixed timeframe for keeping rates low
[KYOTO] Bank of Japan Deputy Governor Masayoshi Amamiya said the central bank had no fixed timeframe for how long it would keep interest rates low but signalled the chance of taking more steps to address the rising cost of easing on parts of the economy.
He also revealed that there were disagreements in the BOJ's nine-member board over how much the central bank should allow bond yields to rise, after a policy decision on Tuesday that gave long-term rates room to move higher.
"We need to always think flexibly about what the most appropriate policy framework could be in achieving our price target," Mr Amamiya told reporters after meeting with business leaders in Kyoto, western Japan.
"Depending on how the effects and side-effects of our policy play out, we'll consider what needs to be done."
With its 2 per cent inflation target remaining out of reach, the BOJ kept interest rates steady on Tuesday and pledged for the first time to maintain rates "very low" for an "extended period of time," taking into account the effect next year's scheduled sales tax hike could have on the economy.
As the cost of prolonged easing accumulates, the BOJ also decided to allow yields to move more flexibly around its zero per cent target, and made tweaks to its asset buying to reduce adverse effects of its policies on markets and commercial banks.
Mr Amamiya said the BOJ's new pledge on future rate moves, called "forward guidance," did not signal any preset idea on when interest rates might rise. But he added the looming tax hike would play a big part in the decision.
"Our new forward guidance is data-contingent, which is to say it isn't calendar based," Mr Amamiya said. "But looking ahead, we'll take into account the fact that historically, an increase in the sales tax rate has had a very big impact on the economy."
Under a yield curve control (YCC) programme, the BOJ guides short-term interest rates at minus 0.1 per cent and the 10-year government bond yield around zero per cent.
Japanese bond yields hit a 1-1/2-year high on Thursday with investors continuing to test the limits of the central bank's new commitment announced two days ago to allow debt markets to move more freely.
BOJ Governor Haruhiko Kuroda told reporters after Tuesday's meeting that the bank would allow 10-year yields to move in a range of around minus 0.2 per cent to 0.2 per cent, double the band it had been moving previously.
The range at which rates could be allowed to move was not mentioned in the BOJ's policy statement, causing confusion in markets on whether the range could change on Kuroda's discretion without approval by the board.
Mr Amamiya conceded there were "slight differences in views" within the board on how much yields should be allowed to fluctuate.
"In the end, there was broad agreement" on the new range, and that it should be mentioned at Mr Kuroda's news conference, Mr Amamiya said, adding that the allowance would not change without approval by the board.
Mr Amamiya said it was premature to make an assessment on recent bond market moves, but stressed that the BOJ would ramp up bond buying if yields rose rapidly.
Five years of heavy money printing have failed to lift inflation to the BOJ's 2 per cent target, forcing the central bank to maintain a radical stimulus programme despite the rising costs such as the hit to bank profits.
Mr Amamiya said the BOJ was mindful that by maintaining its ultra-easy policy, it was hurting financial institutions' profits and that these costs were cumulative.
While the central bank is aware of the potential demerits of its massive stimulus, it would not reduce monetary support just because it is taking longer for inflation to hit its 2 per cent target, he added.
"What's most important is to sustain the economy's positive momentum by maintaining the output gap in positive territory for as long as possible," he said. "That's likely to be the most certain path toward achieving 2 per cent inflation."