BOJ may raise yield target in small step toward normalisation

TOKYO: The Bank of Japan may raise its long-term interest rate target and slow asset purchases further later this year as a small step toward normalising crisis-mode monetary policy, former central bank board member Sayuri Shirai said on Wednesday.

The central bank's decision last week to remove a timeframe for hitting its elusive 2 percent inflation target underscores the hope among policymakers to slow what has become an unsustainable pace of asset purchases, Shirai said.

"BOJ policymakers probably want to raise the bond yield target and slow purchases of assets like government bonds and exchange-traded funds (ETF)," Shirai told Reuters.

"They want to do this in the not too distant future. Their hope is to argue that this is not a full-blown normalisation but only a small step toward that direction. Last week's move was aimed at making that distinction clear," she said.

The BOJ's latest projections released last week show it is losing confidence that inflation will pick up quickly, though waiting until next year would deprive the central bank of an opportunity to raise its yield target, Shirai said.

"If you feel it will take time to achieve your target, you want to seize the right opportunity to prepare yourself with ammunition to fight the next recession," she said.

"The BOJ can do this only when the US economy is doing well and the Federal Reserve is hiking rates steadily," which deters an unwelcome yen spike against the dollar, she said.

Under its yield curve control (YCC) policy, the BOJ now pledges to guide short-term interest rates at minus 0.1 percent and the 10-year government bond yield at around zero percent.

While its main policy target has shifted to interest rates, the BOJ also continues to buy risky assets like ETFs and keeps a loose pledge to buy government bonds so its holdings increase at an annual pace of roughly 80 trillion yen ($728.53 billion).

But actual purchases have slowed to a 50-trillion-yen per year pace as years of huge buying dry up market liquidity.

The BOJ will seek to slow bond buying to a pace of around 20-30 trillion yen, Shirai said.

It may also set a range of zero to 0.25 percent for the 10-year yield target, to give itself more flexibility in guiding policy, she added.

Shirai, a former International Monetary Fund economist who served at the BOJ board until March 2016, retains close contacts with incumbent and overseas policymakers.