Bank Of Japan Changes Policy Focus To Bond Yields

The Bank of Japan (BoJ) has announced a radical shift in its monetary policy strategy. The central bank announced earlier this week that it would now be seeking to address interest rates on government bonds to reach its inflation goals, rather than buying up assets to ease monetary pressure and stimulate growth. The central bank has an inflation target of 2 percent.

According to the new policy, the BoJ would be adjusting the volume of its purchases in the short term to retain the yields of bondsat zero percent. This is expected to lessen the pressure on Japanese banks, improving their profit margins. Governor Haruhiko Kuroda and the policy board have however retained the negative interest rate of minus 0.1 percent.

Kuroda had recently admitted that the negative rate regime was impacting profits of financial institutions as it was driving yields lower. In a statement, Takeshi Minami, chief economist at Norinchukin Research Institute, said,

The BOJ’s decision to steepen the yield curve showed they are taking into account the situation of financial institutions.

Al Jazeera English

The shift in policy suggests that the Bank’s policy of flushing money into the system which has been pursued for many years to ease monetary pressure maybe reaching its limits in terms of effectiveness.The change in policy is also seen as an attempt to control the impact caused to the financial system as a result of the shock decision to impose negative rates earlier this year.

Market analysts have said that the policy reboot could result in a slowing down of the bank’s strategy of buying up assets such as bonds. Yuichi Kodama, chief economist at Meiji Yasuda Life Insurance Co. in Tokyo sees the decision as an indirect admission that the bank has reached the limit of its strategy to buy up Japanese Government Bonds (JGBs). The bank owns over 30 percent of the total outstanding JGBs, amounting to 80 trillion yen.

The Bank has however said that it would continue buying assets at current pace, with Kuroda stating that further purchases would depend on economy and financial markets. Japan's Prime Minister Shinzo Abe has welcomed the change in policy saying that the government would work with the BoJ to boost the stimulus program.

The BoJ’s new policy of maintaining control of cash and bond deposits is expected to increase its hold over the bond markets and will be watched keenly by other central banks who are similarly struggling with poor economic growth. Japanese stocks went up by 2 percent on the news of the shift while the yen weakened against the dollar to 101.76.

Charlie Harrison

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