TOKYO : A new monetary tool introduced by the Bank of Japan to keep long-term interest rates from rising could ultimately become a new policy target once the bank abandons its yield control, a former central bank official told Reuters.
The BOJ maintained ultra-low interest rates on Wednesday, including a 0.5 per cent yield cap, but crafted a new policy tool to defend the ceiling and keep yields across the curve from rising too much – without having to ramp up its bond purchases.
Specifically, the BOJ amended rules for an existing market operation tool, so it can pump funds extending up to 10 years in variable rates to financial institutions against collateral.
Unlike its bond-buying operation, the fund-supply tool allows the central bank to push down borrowing costs with a wall of money – without having to worry about drying up bond market liquidity with its massive purchases, analysts say.
Tetsuya Inoue, a senior researcher at Nomura Research Institute and a former BOJ official, said the central bank probably had another, long-term objective for the tool: guiding interest rates after ending yield curve control (YCC), a policy that sets a -0.1 per cent target for short-term rates and that for the 10-year bond yield around zero.
When the BOJ decides to ditch the 10-year yield target, it could guide shorter-duration yields, such as those for five-year notes, by offering funds of those maturities at certain rates under the fund-supply operation, he said.
“With this new tool, the BOJ may have prepared for when it ends YCC and begins normalising monetary policy,” Inoue told Reuters on Thursday.
“If the BOJ sees the need to set a new policy rate for shorter-maturity yields after ditching the 10-year yield target, this fund-supply operation could come in handy,” he said.
The new operation would function in a way similar to the European Central Bank’s targeted longer-term refinancing operations programme, under which the central bank offered cheap, long-term loans to financial institutions as an incentive for them to boost lending.