The Bank of Japan held a Monetary Policy Meeting on Tuesday 18th January, during which the Policy Board made several important decisions. The first decision was a unanimous vote for yield curve control. The Bank set guidelines for market operations for the intermittent period, including a negative interest rate of -0.1% for Policy-Rate Balances in current accounts held by financial institutions at the Bank, and the purchase of a necessary amount of Japanese government bonds (JGBs) without setting an upper limit so that 10-year JGB yields will remain at around zero percent.
The BoJ have also stated that it will continue to allow 10-year JGB yields to fluctuate in the range of around plus and -0.5% from the target level, and will offer to purchase 10-year JGBs at 0.5% every business day through fixed-rate purchase operations unless it is highly likely that no bids will be submitted. In order to encourage the formation of a yield curve that is consistent with the above guideline for market operations, the Bank will continue with large-scale JGB purchases and make nimble responses for each maturity by increasing the amount of JGB purchases and conducting fixed-rate purchase operations.
The second decision, also a unanimous vote, was for guidelines for asset purchases. With regard to asset purchases other than JGB purchases, the Bank decided to set the following guidelines. The Bank will purchase exchange-traded funds (ETFs) and Japan real estate investment trusts (J-REITs) as necessary with upper limits of about 12 trillion yen and about 180 billion yen, respectively, on annual paces of increase in their amounts outstanding. The Bank will also purchase CP and corporate bonds at about the same pace as prior to the coronavirus (COVID-19) pandemic, so that their amounts outstanding will gradually return to pre-pandemic levels, namely, about 2 trillion yen for CP and about 3 trillion yen for corporate bonds.
In addition the BoJ have decided by unanimous votes to 1) extend by one year the deadline for loan disbursement under the Fund-Provisioning Measure to Stimulate Bank Lending, 2) to expand the range of eligible counter-parties for the Funds-Supplying Operations to Support Financing for Climate Change Responses to include member financial institutions of central organisations of financial cooperatives, and 3) to enhance the Funds-Supplying Operations against Pooled Collateral.
The BoJ have also stated that it will continue with Quantitative and Qualitative Monetary Easing (QQE) with Yield Curve Control, aiming to achieve the price stability target of 2 percent, as long as it is necessary for maintaining that target in a stable manner. It will continue expanding the monetary base until the year-on-year rate of increase in the observed consumer price index (CPI, all items less fresh food) exceeds 2 percent and stays above the target in a stable manner.
As such, this may lead to a decrease in the value of the Japanese Yen as the expansion of the monetary base could result in an increased inflation rate, thus decreasing the purchasing power of JPY. Central banks and traders expected the BoJ to start tightening it's monetary policy in the nearer future, however the BoJ thus far seem to be remaining with a loose policy and haven't shown signs of policy tightening under Governor Kuroda's last months of leadership. Eyes are very much on the election of the next BoJ Governor, and whether the bank's loose policy could finally begin to tighten.
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