BOJ’s Kiuchi warns against raising bond yield target
KOFU – Dissenting Bank of Japan board member Takahide Kiuchi warned that raising the bank’s bond yield target near-term would be problematic as inflation remains well below its 2 percent goal.
Kiuchi, a sole proponent in the nine-member board of winding down the BOJ’s massive stimulus program, reiterated on Thursday his calls for the central bank to normalize its unconventional monetary easing steps at an “appropriate timing.”
His comments highlighted the challenges of a new policy framework already facing headwinds from rising global interest rates.
He criticized the objective of capping 10-year government bond yields around zero, saying that this could force the central bank to top up an already huge bond buying operation and make it unsustainable.
A growing number of analysts now expect the BOJ’s next step to be a withdrawal, not an expansion, of stimulus most likely through an increase in its 10-year yield target.
But Kiuchi said changing the BOJ’s yield target would not be easy as doing so frequently could erode its credibility.
“It would be unreasonable to raise the 10-year bond yield target in the near future when the inflation rate remains at a low level,” Kiuchi said in a speech to business leaders in Kofu, in the eastern Japanese prefecture of Yamanashi.
Japan’s core consumer prices fell 0.2 percent in December from a year earlier, the slowest annual pace in nearly a year but marking the 10th straight month of declines.
The BOJ revamped its policy framework in September last year to one better suited for a long-term battle with deflation, after three years of aggressive asset purchases failed to accelerate inflation to 2 percent.
It now guides short-term interest rates at minus 0.1 percent and the 10-year bond yield around zero percent through massive bond purchases.
The BOJ’s attempt to control the yield curve has faced challenges as global long-term interest rate rises, driven by expectations of steady rate hikes by the U.S. Federal Reserve, put upward pressure on Japanese long-term rates.
A former market economist, Kiuchi has been the sole opponent of the BOJ’s massive asset-buying program and has been proposing unsuccessfully to taper asset purchases.
He also voted against the BOJ’s September decision to move to a new policy framework, calling instead to target and scale down the bank’s pace of money printing.
“Controlling (long-term) interest rates could increase volatility in the economy and destabilize it” by keeping borrowing costs too low and over-heating the economy, he said.
The central bank’s huge bond buying also dries up market liquidity and impairs market functions, Kiuchi said. -Reuters