Money Briefs: New BOJ framework marks progress

BOJ Governor Haruhiko Kuroda said Monday the central bank stood ready to use every possible policy tool to achieve its 2-percent inflation target.

The Bank of Japan’s new policy framework has made its monetary easing more sustainable and effective, according to the International Monetary Fund, which also suggested the BOJ further enhance its communications.

Japanese Yen investors expressed disappointment with last week’s decision by the Bank of Japan to overhaul its monetary policy.

But one member, likely one of the two dissenters to the decision, said it was uncertain whether the yield curve control would allow the BOJ to reduce its massive bond buying – deemed unsustainable by critics.

He added that the pace of the BOJ’s government bond buying may fluctuate under its new yield curve control, though there would be no policy implication to such changes.

First, the detail. Rather than go further into negative interest rate territory to stimulate its economy the Japanese central bank held firm to its -0.1pc deposit rate at a meeting last week. The central bank said falling lending rates have eroded margins, enfeebling banks’ ability to lend.

At the July meeting, some board members said Japan’s inflation expectations were vulnerable to external shocks such as oil price declines and slowdown in overseas economies. By adopting a yield target, the central bank is indirectly funding Treasuries, another form of “helicopter money”.

We regard the BOJ’s new policy regime as a positive development and continue to prefer Japanese equities in our global asset-allocation strategy. If necessary, the BOJ can also choose to expand the monetary base faster, Kuroda said.

Traditionally longer-term loans earn more interest but the low interest environment, in part caused by thre central bank’s own purchases of longer-term debt via QE forced down longer-term rates as well as the already low short-term rates.

Kuroda said daily moves in 10-year yields would not have much effect on the BOJ’s policy, stressing the importance of guiding the entire yield curve to a desirable shape.

On Friday, Summers said the natural rate of interest – the short-term real interest rate consistent with full employment – has fallen so far in advanced economies that conventional monetary policy can not bring rates low enough to create full employment.

Weinberg and other critics also contend that it’s hard to square the BOJ’s attempts to maintain stimulus when a steepening of the yield curve and a rise in long-term interest rates would common-sensically be viewed as a tightening of monetary conditions.