KAGOSHIMA, Japan: Bank of Japan Deputy Governor Masayoshi Amamiya said the central bank could widen the band at which it allows long-term interest rates to move around its target, signalling its readiness to accept further falls in bond yields if driven by market forces.
The BOJ currently allows 10-year government bond yields to move roughly 40 basis points around its 0% target, essentially setting a -0.2% floor on long-term rates.
But global economic uncertainties and expectations of prolonged ultra-loose policies by major central banks have pushed down bond yields across the world including in Japan, where 10-year bond yields have slid near the floor.
Amamiya said the BOJ did not have a preset level in mind on how low it will allow bond yields to fall. The central bank will look not just at underlying levels but the expected path, the degree of volatility and factors driving yield moves, he added.
“If there are big moves in yields, there's a chance the BOJ will widen the band," he told a news conference on Thursday after meeting business leaders in Kagoshima, southern Japan.
Amamiya said such a move would be defined as a monetary easing step.
Under a policy dubbed yield curve control (YCC), the BOJ guides short-term rates at -0.1% and 10-year government bond yields around 0%. It also buys government bonds and risky assets such as exchange-traded funds (ETF).
Widening the band for bond yield moves has been considered by markets as among options the BOJ could choose if it were to ease policy further, as it would mean allowing market forces to drive yields deeper into negative territory.
At its policy meeting on Tuesday, the BOJ held off expanding stimulus but committed to doing so “without hesitation" if a global slowdown jeopardises the country's economic recovery.
Amamiya welcomed the U.S. Federal Reserve's decision to cut rates on Wednesday, saying that the move would have a positive effect on Japanese and global economies by keeping U.S. growth on a solid footing.
The BOJ, too, could ease policy as an insurance against risks to the economy, though it will not necessarily give markets any advance signal of such action, Amamiya said.
“We don't intend to have markets factor in our action in advance. What's important is to have markets accurately understand our assessment of the price trend and our policy stance," he said.
The BOJ faces a dilemma. Years of heavy money printing have pushed rates below zero, narrowing financial institutions' margin and leaving the central bank with much less ammunition than its U.S. counterpart to fight another recession.
Amamiya brushed aside the view the BOJ was running out of tools to loosen policy, echoing Governor Haruhiko Kuroda's comments at Tuesday's policy meeting that the central bank is prepared to expand stimulus “without hesitation" to head off economic risks.
“It's true we could be more careful in assessing the merits and demerits of additional action than other central banks," Amamiya said. “But just because we've eased so much already does not mean any further steps would be limited or small."
The protracted Sino-U.S. trade war has hurt Japan's exports and business sentiment, casting doubt on the BOJ's view that robust domestic demand will offset the pain from the global slowdown.