By shifting its prime policy target to interest rates from base money at its review next week, the Bank of Japan will consider making negative interest rates the centerpiece of future monetary easing, reported Reuters citing sources.

As more than three years of aggressive bond buying is draining market liquidity, the growing concerns in the central bank and financial markets over the limits to the BOJ’s economic stimulus efforts would be underscored by the change.

While trying to convince the public that its massive money printing will boost economic activity and prices, BOJ’s unique monetary experiment also attempted to crush yields across the curve and this would also be a shift away from that strategy.

“Among the BOJ’s policy tools, the priority will likely shift more towards interest rates and away from huge bond purchases,” said one of the sources to Reuters on condition of anonymity.

The BOJ will put more emphasis on negative rates as a tool for future easing, the Nikkei reported earlier on Wednesday.

The BOJ is unlikely to adopt an explicit cap on long-term rates or abandon its current base money target, which is the amount of money it commits to print each year, the sources said.

Growing market views that the unpopularity of negative rates among the public would discourage it to cut rates, even if it would arrest unwelcome rises in the yen, are hoped to be dispelled by BOJ by shifting its policy focus to negative rates.

Japan’s export machine could be pressurized by a rising yen, which has already surged nearly 17 percent so far this year, as a prolonged period of indecision by the Federal Reserve could undermine the dollar and push up the yen.

The sources however said that there is no consensus in the BOJ yet on whether to deepen negative rates at the Sept. 20-21 meeting.

Whether the board members feel that doing so would be necessary to reinforce the bank’s commitment to achieving its inflation target and yen moves will e the drivers for that decision, the sources reportedly said.

Such a modest fine-tuning of the current policy framework is preferred by most BOJ board members. However more radical options are not off the table, such as ditching setting an explicit cap on bond yields as the markets are increasingly expecting some form of easing at the review.

By adding negative rates to its massive asset-buying program launched in 2013, the BOJ shocked markets and the government in January. Via purchases of bonds and risky assets, it has pledged to increase base money at an annual pace of 80 trillion yen ($777 billion) under that scheme.

How much effect increasing base money has had in heightening inflation expectations is the question that many BOJ officials are asking.

But due to fear of triggering market fears it will taper its asset buying they are equally wary of entirely abandoning the base money target, the bank’s prime policy target.

The sources said that the pace of asset purchases and the base money target would be maintained by the BOJ. But for a portion of excess reserves financial institutions park with the bank, it will consider changing its prime policy target to the 0.1 percent negative rate it now charges.

(Adapted from Reuters)

Categories: Economy & Finance