Key tweaks to BOJ’s yield curve control, stimulus programme

The Bank of Japan loosened its grip on long-term bond yields and laid the groundwork to taper its huge asset purchases, as part of steps to make its stimulus programme sustainable enough to weather a prolonged battle to fire up inflation.

The following is a summary of key results of the central bank’s review of its policy tools, which was announced after its two-day policy meeting that ended on Friday:

OPERATIONAL TWEAKS TO YIELD CURVE CONTROL
** The BOJ left unchanged its 0% target for 10-year bond yields. But it clarified that long-term yields can move up and down 0.25% around the target, slightly more than the implicit 0.2% level that markets had seen as the BOJ’s line in the sand.

** The move is aimed at allowing yields to fluctuate more and breathe life back into a market made dormant by the BOJ’s dominance. But the BOJ stressed the priority was to keep yields “stably low” as the economy feels the damage from COVID-19.

** The BOJ won’t try to prevent yields from falling below the band too rigidly. But it will act forcefully to prevent sharp rises in yields with a new weapon – a “special” operation under which it will buy unlimited amounts of bonds for consecutive days at a set price.

TWEAK TO ASSET PURCHASES
** The BOJ removed guidance to buy exchange-traded funds (ETF) at an annual pace of roughly 6 trillion yen to make its purchases more “flexible and nimble.”

** Instead of buying at a set pace, the BOJ will buy ETFs only when markets destabilise under a 12 trillion-yen ceiling it set when COVID-19 jolted stock prices in March last year.

** BOJ staff will immediately report to the board whenever they buy ETFs to ensure there is governance on how the purchases are made. The rule suggests the BOJ won’t step into the market so frequently, some analysts say.

** The BOJ said it will keep purchases of ETFs to only those linked to the broader Topix, removing Nikkei-linked ETFs from the programme.

** The BOJ also took out guidance to buy real-estate trust funds (REITs) by 90 billion yen per year, saying it will only buy when markets destabilise under a ceiling of 180 billion yen.

MITIGATING SIDE-EFFECTS
** The BOJ adopted a new scheme similar to that of the European Central Bank, under which it pays interest of up to 0.2% to financial institutions that tap its loan programmes.

** The scheme is aimed at mitigating the side effects of negative rates, which have hurt financial institutions’ margin and could eventually discourage them from boosting lending.

** The BOJ says the scheme is part of efforts to dispel a dominant market view that the accumulating side-effects of its easy policy will discourage the BOJ from cutting rates further.

** The BOJ also made tweaks to its three-tier deposit reserve system to address distortions its negative rate policy created in Japan’s money market.

** In four of the BOJ’s eight rate-setting meetings each year, the board will be briefed on financial system risks from the bank’s division in charge. This will ensure any decision to ramp up stimulus will take into account the impact on Japan’s fragile banking sector.