BOJ’s Pivot Focuses Attention on Next Hike, Asset Disposal

The Yomiuri Shimbun
Bank of Japan Gov. Kazuo Ueda answers questions from reporters Tuesday after meeting with Prime Minister Fumio Kishida at the Prime Minister’s Office.

With its unprecedentedly large-scale monetary easing measures having lost momentum, the Bank of Japan has decided to terminate its negative interest rate policy. Japanese government bonds (JGBs) and exchange-traded funds (ETFs) have piled up on the central bank’s balance sheets, while some of the easing measures have lost meaning. It will take time for the monetary easing policy to be fully scaled back, and the development of future policy will be a critical priority for the BOJ.


“We do not expect deposit and lending rates to rise significantly,” BOJ Gov. Kazuo Ueda said Tuesday, noting that the lifting of negative interest rates would have a limited impact on households and businesses.

Since introducing this policy in February 2016, the central bank had applied an interest rate of minus 0.1% to some current account balances of private financial institutions held at the BOJ so as to encourage them to provide financing or put the funds to other use. As a result, businesses and individuals had found it easy to borrow money.

At Tuesday’s monetary policy meeting, two of the nine policy board members, Toyoaki Nakamura and Asahi Noguchi, opposed lifting this policy by saying that it should be continued until small and medium-sized enterprises have more capacity to raise wages.

The BOJ will use the uncollateralized overnight call rate — an interest rate applied when financial institutions lend and borrow short-term funds — as the policy interest rate and guide it to “remain at around 0% to 0.1%.”

The bank also eliminated its yield curve control (YCC) measures, which capped long-term bond yields around zero. The BOJ has been pushing down yields by purchasing large amounts of JGBs. Recently, however, it has set the upper bound for long-term bond yields at 1% “as a reference” and even allowed them to rise above the target to a certain extent. An attitude has been expressed in the market that the YCC has become “a mere formality.”

Even after Tuesday’s decision, the BOJ will continue its JGB purchases in broadly the same amounts as before, or ¥6 trillion per month, and will flexibly increase the amount in the event of a sharp rise in interest rates that would shock the economy. Ueda described this safety measure as a “backstop.”

So, will additional interest rate hikes ever happen? Ueda took a cautious stance on future policy management by saying, “There is still some distance to go toward achieving a stable 2% inflation target. For the time being, it is important to maintain an environment of monetary easing.”

Another BOJ official also said, “Price increases supported by demand will start from the middle of next year.”

However, the BOJ’s policy decisions will be greatly influenced by factors such as overseas economic conditions.

Daiwa Securities SMBC Co. chief market economist Mari Iwashita said, “The BOJ may decide to raise policy interest rates to 0.25% around autumn if the outlook for U.S. monetary policy becomes more promising.”

In March 2006, the BOJ lifted its quantitative easing policy when Gov. Toshihiko Fukui took office and raised interest rates to 0.25% in July 2006 and to 0.5% in February 2007. At that time, the BOJ could not foresee a slowdown in the economy, resulting in it taking time for the economy to overcome deflation. Despite uncertainty about the future this time as well, a megabank executive believes the rate “will rise to 0.5% by the end of the year.”

End of ETF purchases

The BOJ has also decided to end new purchases of ETFs and real estate investment trusts (REITs). This monetary easing method was introduced in December 2010 when Masaaki Shirakawa was governor. The volume of the purchases then increased in one fell swoop under the “quantitative and qualitative monetary easing” taken by Shirakawa’s successor as governor, Haruhiko Kuroda.

Until March 2021, the BOJ had set a goal to purchase several trillion yen per year, but then eliminated the ¥6 trillion annual ETF purchase target and curbed purchases. The bank has not purchased ETFs since last October, and the policy has lost substance.

Even so, the BOJ’s holdings of ETFs have ballooned, amounting to ¥37 trillion on a book value basis as of the end of February, with unrealized gains amounting to ¥23 trillion as of the end of last September. The balance will not decrease unless the assets are sold — unlike JGBs, which are redeemed when they come due. On Tuesday, the BOJ did not go into detail on how to dispose of its ETFs in the future.

A senior investment strategy researcher at Mitsubishi UFJ Morgan Stanley Securities Co. said, “No central bank buys stocks in any [other] country, and from the perspective of foreign investors, this was an unusual approach.”