News: Factbox: What could change under BOJ’s March policy review.
TOKYO (Reuters) – The Bank of Japan will announce the results of its review of its policy tools on Friday to make it more sustainable as the economic impact of the COVID-19 pandemic prolongs the battle to reach its elusive 2 becomes% inflation target.
The following are options that the review is likely to discuss:
TWEAK GUIDE TO ETF PURCHASES – VERY LIKELY
In view of the increasing holdings of risky assets, the BOJ wants to give itself more flexibility to reduce purchases of Exchange Traded Funds (ETF) in calm markets.
This would give the BOJ more leeway to stimulate buying when market turmoil threatens the Japanese economy.
The BOJ may cancel either of its two commitments to buy ETFs, which can be bought at an annual rate of around 6 trillion yen and up to 12 trillion yen.
Fine-tuning the YCC – very likely
The BOJ has managed to keep interest rates in a tight range under YCC control – but perhaps too much, as their large presence creates criticism of the drying up of market liquidity and the distortion of prices.
To address these concerns, the BOJ will find ways to allow market forces to drive bond prices higher. The challenge, however, is how to do this without increasing the returns too much.
The BOJ is likely to provide clearer guidance on what it considers to be an acceptable level of turnover. This can be done in the form of a loose area around the 0% target, combined with linguistic stress that does not tolerate yield peaks.
CHANGE BOJ’S TIERED RESERVE SYSTEM – LIKELY
Many market participants believe that the BOJ will not be able to deepen negative interest rates because of the strain that politics is already putting on the profits of financial institutions.
The BOJ will seek to dispel such a view and convince the markets that rate cuts are not off the table, for example by taking steps to mitigate the side effects of negative interest rates.
One idea is to optimize a three-tier deposit system in order to free a larger part of the reserves from negative interest rates.
The BOJ may also pledge additional measures it could take if it actually deepens negative interest rates, such as introducing loan programs to reward banks for borrowing funds from the BOJ.
BUY OR ACCEPT GREEN ASSETS AS COLLATERAL – INCREDIBLE
The BOJ has announced that the review will aim to make its policies “more effective,” suggesting that it might look for new tools to aid the government’s efforts to fuel Japan’s long-term growth.
The BOJ could start buying or accepting environmentally friendly “green” assets as collateral for their lending systems. This would be in line with Prime Minister Yoshihide Suga’s “green” growth strategy, which aims to boost investment in climate-neutral technology.
However, Deputy Governor Masazumi Wakatabe ruled the idea out, saying it was out of the scope of review.
OVERHAUL YCC, TWEAK FORWARD GUIDANCE – INCREDIBLE
The BOJ was clear on what will not change after the March review. It will not revise the YCC, as well as its 2% inflation target and its projections such as a commitment to maintain its ultra-light policies until inflation stably exceeds 2%.
This means that the review will be more of a fine-tuning of the BOJ’s current policy framework to make it more sustainable.
However, the central bank can provide clearer guidance on how long it will keep interest rates low, or when it could cut them. For now, it just pledges to “maintain current low rates or expect them to move at lower levels”.
Reporting by Leika Kihara; Adaptation by Jacqueline Wong
Original Source © Reuters