Bank of Japan policymakers were at logger-heads on the amount which they should allow bond yields to fall, as they fret over a worsening global economic outlook and the increasing costs of extended easing, according to a summary of their opinions at December rate review.
Some policymakers also cautioned that the 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 indicated signs of sluggishness in China’s economy and the influence of the US-China trade friction is having on Japan’s business sentiment.
Japan’s long term yields have slumped to multi-million 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 wiggle room.
Markets are focusing on whether the BOJ will tolerate the 10-year bond yields slipping into 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 stating.
“Attempting to bring interest rates back up (via market operations) would be tantamount to monetary tightening,” as recent falls in yields are fueled by worries over the global economic outlook, another member stated.
However, several others disagreed, reflecting the growing worries within the BOJ its huge bond-buying is drying up 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 let yields to increase more as current ultra-low rates are straining Japan’s corporate bond market, according to another market, 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.”
During the December meeting, the BOJ kept intact its policy of guiding short term rates at negative 0.1 percent and the 10-year bond yield around zero percent.
The BOJ is currently in a bind, with inflation far from its target, forcing it to maintain a massive stimulus in spite of the negative spillovers.
In spite of the grumblings from the board on the worsening global economic outlook, its dwindling policy ammunition limits the ability to ramp up stimulus to prevent another recession.
Data released on Friday showed the Tokyo core consumer inflation, which is a major indicator of nationwide price trends, at 0.9 percent in December.
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