The Bank of Japan (BOJ) announced the results of a policy review at its meeting on 18-19 March. The review resulted in several changes to the BOJ’s asset purchases and interest-rate targeting Yield Curve Control (YCC) program, but on the whole, the policy review indicates that the BOJ will remain committed to monetary easing over the long term. The bank’s commitment to overshoot the inflation target remains, and the YCC program means that the BOJ will continue to shape the yield curve to prevent a sharp spike in bond yields even as the government runs larger deficits. BOJ Governor Haruhiko Kuroda, meanwhile, continues to signal that the bank will act “without hesitation” in response to a downturn or slowing inflation, and continues to hold the option of cutting interest rates deeper into negative territory if necessary.
The review was driven in large part by the increasingly distant prospect of reaching the 2% inflation target the bank adopted in 2013. As if to underscore the point, the government announced on Friday, 19 March that the core consumer price index (CPI), excluding fresh food, had fallen 0.4% year-over-year in February, the seventh consecutive fall. Not unlike the BOJ’s 2016 policy review, which resulted in YCC, the BOJ’s interest-rate targeting program, and a commitment to overshoot the 2% target, the latest policy review was intended to find ways to give the bank more room to pursue accommodative monetary policies for longer on the assumption that it could still take years before the bank reaches its target.
Accordingly, while the BOJ maintained the overall structure of its policy framework, it announced several adjustments to its policies. The change with the most immediate impact is the bank’s decision to drop a firm target to purchase JPY 6tn (USD 55.1bn) worth of exchange-traded funds (ETF) per year, a policy that has led the BOJ to become Japan’s single largest shareholder. While the BOJ will still have the option of purchasing up to JPY 12tn (USD 110.2bn) per year of ETFs tracking the Tokyo Stock Price Index (TOPIX) – extending a ceiling introduced in 2020 to combat the Covid-19 shock – the new policy guidance calls for the BOJ to enter market only during “times of heightened market instability.” Meanwhile, the BOJ’s new interest rate guidance maintains current targets for short-term (-0.1%) and long-term (0%) interest rates but will widen the band within which long-term rates are allowed to fluctuate to ±0.25%. This latter policy could reduce the need for the BOJ to use YCC to purchase government bonds and allow more liquidity in bond markets.
In addition to these changes, the bank will also continue to buy up to JPY 12tn (USD 110.2bn) in commercial paper and corporate bonds at least through September 2021 and extend other emergency lending vehicles. It also announced a new program to help offset of interest-rate cuts on financial institution balance sheets by temporarily providing higher interest rate payments to lenders out of Covid-19 emergency funds.