December 28, 2018 / 12:11 AM / 5 months ago

BOJ at logger-heads on how much yield falls to tolerate: December summary

TOKYO (Reuters) - Bank of Japan policymakers were at logger-heads on how much they should allow bond yields to fall, as they fret over a worsening global economic outlook and the rising cost of prolonged easing, a summary of their opinions at a December rate review showed.

FILE PHOTO: A man runs past the Bank of Japan (BOJ) building in Tokyo, Japan, July 29, 2016. REUTERS/Kim Kyung-Hoon/File Photo

Some policymakers also warned that achievement of the central bank’s 2 percent inflation target could be further delayed by recent oil price falls and growing signs of weakness in Japan’s economy, the summary showed on Friday.

“Uncertainty over the global economic outlook is heightening. Given such conditions are likely to persist, risks are generally skewed to the downside,” one of the nine members of the board was quoted saying.

Others also pointed to signs of slowdown in China’s economy and the impact Sino-U.S. trade frictions is having on Japan’s business sentiment.

Japan’s long-term yields have slid to multi-month lows as investors hoard safe-haven government bonds on fears of a global slowdown, undermining the BOJ’s efforts to steepen the yield curve to give financial institutions some breathing space.

Markets are focusing on whether the BOJ will tolerate the 10-year bond yields falling to negative territory, in line with a decision it made in July to allow long-term rates to move in a range of around minus 0.2 percent to plus 0.2 percent.

“Long-term yields should be allowed to temporarily turn negative” to keep monetary policy ultra-loose, one member was quoted as saying.

“Attempting to bring interest rates back up (via market operations) would be tantamount to monetary tightening,” as recent falls in yields are driven by concerns over the global economic outlook, another member said.

But several others disagreed, reflecting growing worries within the BOJ its huge bond-buying is drying up market liquidity and narrowing financial institutions’ margins by pushing long-term rates too low.

“There is likely room to revise the BOJ’s market operation to some extent,” as it could keep yields sufficiently low with fewer purchases, one member was quoted as saying.

The central bank should allow yields to rise more as current ultra-low rates are straining Japan’s corporate bond market, another member said, adding that widening the bond-yield range window or shortening the duration of bonds the BOJ targets as its policy rate could be a “future option.”

At the December meeting, the BOJ kept intact its policy of guiding short-term rates at minus 0.1 percent and the 10-year bond yield around zero percent.

The BOJ is caught in a bind. With inflation distant from its target, it is forced to maintain a massive stimulus despite the negative spillovers.

Despite grumblings from the board on the worsening global economic outlook, it dwindling policy ammunition limits the ability to ramp up stimulus to prevent another recession.

Data released on Friday showed the Tokyo core consumer inflation, a leading indicator of nationwide price trends, at 0.9 percent in December.

Reporting by Leika Kihara; Editing by Chris Gallagher & Shri Navaratnam

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