BOJ to keep ultra-low rates, may debate fine-tuning yield cap
By Leika Kihara
TOKYO (Reuters) — As aggressive U.S. interest rate hikes look like they might be nearing an end, Japan's central bank faces its own tricky decision this week over whether it should take another step towards phasing out its controversial yield control programme.
While inflation has held above the Bank of Japan's 2% target for more than a year, Governor Kazuo Ueda has vowed to keep ultra-loose policy until he is more convinced the economy can weather global headwinds and allow firms to keep hiking wages next year.
At the two-day meeting ending on Friday, the BOJ is expected to maintain its yield curve control (YCC) targets at -0.1% for short-term interest rates and 0% for the 10-year bond yield.
But the board may debate making minor tweaks to the policy, such as widening the allowance band set around the 10-year yield target, if it feels the cost of YCC is beginning to outweigh the benefits, say sources familiar with its thinking.
«The decision will depend on the balance between the benefits and cost,» one of the sources said, a view echoed by another source. «The key is to ensure YCC is sustainable.»
To mitigate the demerits of YCC, the BOJ widened the band set around the yield target last December and now allows the 10-year yield to rise by up to 0.5%, taking pressure off the bank to gobble up huge sums of bonds to defend the ceiling.
With the BOJ set to keep short-term rates negative, a tweak to the yield cap or allowance band is unlikely to trigger a spike in borrowing costs that would severely hurt the economy.
Haunted by a history of prolonging deflation with premature monetary tightening, however, many BOJ policymakers are wary of pulling the trigger too soon, which could end nascent signs of change
Read more on investing.com
