Bank Of Japan Widens Yield Target Range

bankofjapan dec27 19mar21 lt

The Bank of Japan decided Friday to widen the range at which it permits the yields of government bonds to fluctuate and scrapped the average exchange traded fund buying target.

The board, governed by Haruhiko Kuroda, voted 8-1 to maintain the interest rate at -0.1 percent on current accounts that financial institutions maintain at the central bank.

Also, the central bank decided to continue to purchase necessary amount of Japanese government bonds without setting an upper limit so that 10-year JGB yields will remain at around zero percent.

However, the bank said it will allow the range of 10-year JGB yields to fluctuate between plus and minus 0.25 percent from the target level.

The BoJ will introduce "fixed-rate purchase operations for consecutive days" as a tool to set an upper limit on interest rates when necessary.

Further, the Japanese central bank scrapped its average exchange traded fund, or ETF, buying target of JPY 6 trillion and pledged to buy them only "as necessary".

The bank said it will buy ETFs and Japan real estate investment trusts as necessary with upper limits of about JPY 12 trillion and about JPY 180 billion, respectively.

The BoJ also decided to establish the Interest Scheme to Promote Lending. The interest rate, which will be linked to the short-term policy interest rate, will be applied to a certain amount of financial institutions' current account balances.

The latest announcement contained a wide range of tweaks to the bank's policy levers but ultimately marked neither a tightening nor an easing of policy, Tom Learmouth, an economist at Capital Economics, said.

While the bank is expected to continue to leave its major policy settings unchanged for the foreseeable future, the economist said the introduction of the new lending scheme increases the chances of the policy rate being cut from -0.1 percent deeper into negative territory come a future shock such as a sharp appreciation in the yen.

"We think the Bank may widen the tolerance band [of JGB yield target] further in future," Learmouth added.

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