Kuroda signals room to ramp up stimulus as economic risks rise

Tokyo

THE Bank of Japan maintained its ultra-loose monetary policy on Thursday but its governor warned of heightening risks to the economic outlook, suggesting the central bank's next move could be to ramp up - not whittle down -- its massive stimulus.

In a widely expected move, the BOJ kept its short-term rate target at minus 0.1 per cent and the 10-year yield target around zero per cent under a policy dubbed yield curve control (YCC).

It also reaffirmed its view the economy is on a solid footing, even as fears of slowing global growth jolt markets and lowered prospects for hitting its 2 per cent inflation target.

BOJ governor Haruhiko Kuroda, however, warned that global economic uncertainties are heightening and that the central bank has tools available to boost stimulus if necessary. "There are more downside risks to Japan's economy, particularly via overseas economic developments," Mr Kuroda told a news conference.

"If we think doing so would be necessary to sustain the momentum for achieving our price target, we will ease monetary policy further as appropriate." The BOJ is in a dilemma. Years of heavy money printing has left it with little ammunition to battle another recession, and the global economic slowdown is depriving the central bank of any near-term chance to restock its tool-kit.

Even maintaining the current stimulus is proving costly as ultra-low rates strain regional banks' profits and its huge purchases dry up bond market liquidity.

"The BOJ is being caught between the need to address the side-effects of its stimulus, and prospects of a global slowdown and trade war. As such, it may not be able to move in either direction next year," said Hiroshi Shiraishi, senior economist at BNP Paribas Securities.

"The BOJ may be forced into further easing in 2020 as Chinese and US economies slow more, which would hurt Japan's exports and capital expenditure."

The central bank board met hours after the US Federal Reserve raised rates and said it was keeping the core of its plan to tighten monetary policy intact, despite rising uncertainty about global economic growth.

Subdued inflation has forced the BOJ to maintain a massive stimulus despite the rising cost of prolonged easing, such as the hit to financial institutions' profits from near-zero rates.

The central bank tweaked its policy framework in July to make it more sustainable, including by allowing bond yields to move more flexibly around its zero per cent target.

The move was partly intended to allow for a natural rise in long-term rates, so financial institutions could reap profits from a steepening yield curve.

But Japanese long-term rates have traced US Treasury yields lower reflecting investors' risk-averse stance. The yield on the 10-year Japanese government bond fell to 0.010 per cent on Wednesday, its lowest since September last year.

Mr Kuroda said he saw no major problems with recent declines in Japanese long-term rates, saying they were a natural reflection of falling global yields.

Still, persistent declines in yields could cause unease among some BOJ board members, who have publicly voiced concern over the dangers of excessive yield declines, analysts say.

"The BOJ could slow its bond buying to prevent excessive yield falls. But doing so too much risks pushing up the yen," said Takahide Kiuchi, a former BOJ board member who is now executive economist at Nomura Research Institute.

"This is just an illustration of the flaws of YCC." REUTERS