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Bank of Japan (BoJ) is getting close to tapering its record asset purchase program that began back in 2012. Under the current easing program, BoJ has kept its interest rates at -0.1 percent, purchasing assets at a pace of ¥80 trillion and using buying and selling of securities for yield curve control (YCC) that as of now aims to keep 10-year yield close to zero percent. While the central bank has vowed to keep the easing tap open until inflation reaches central bank’s 2 percent target, the recent speech by Governor Kuroda in Zurich indicates that the central bank is preparing to cut down on its easing programs. For the first time since commencing the policy, Governor Kuroda highlighted that risk associated with keeping 10-year yields close to zero percent.
In addition to that, new BoJ board member Hitoshi Suzuki gave out a much clearer signal that the central bank is preparing to reduce the monetary policy expansion. Suzuki in an interview with Jiji news said that the BOJ could slow its purchases of exchange-traded funds (ETF) or change the way it buys them in the future. In a separate interview with the Mainichi daily newspaper, he said, “It’s inappropriate for interest rates to show no changes until the 2 percent inflation target is hit, and then jump abruptly once the target is achieved….There is room to debate a fine-tuning of YCC once inflation heads near 2 percent so that markets can gradually accept the changes”. He also pointed out that the expansionary monetary policy with YCC and negative interest rates might be hurting Japanese financial institutions and if that is the case then monetary policy can’t function effectively, “If the health of financial institutions is in trouble, it’s possible monetary policy won’t function well….I‘m carefully watching how our policy of controlling the yield curve affects the economy, and whether or not it is creating any distortions”.
These are the strongest possible signals given out by the policymakers at the central bank. We expect the central bank to begin reducing monetary accommodation next year.
