The Bank of Japan suggests an end to risky asset purchases and rules out swift rate increases

NARA: In the clearest indication yet that the Bank of Japan’s enormous stimulus program was coming to an end, Deputy Governor Shinichi Uchida said that the bank would probably stop buying riskier assets but will not raise interest rates quickly while reducing monetary support.

Uchida expressed his increasing confidence that the circumstances for gradually phasing off stimulus were coming together and said that prices in the service sector are rising as more businesses raise salaries and pass on rising labor expenses.
In a widely followed speech on Thursday in Nara, western Japan, Uchida said, “If the sustainable and stable achievement of our 2% inflation target comes in sight, the large-scale monetary easing will have fulfilled its role and we’ll explore whether it should be revised.”
According to him, eliminating negative interest rates—which the markets anticipate happening in March or April—would be the same as raising short-term interest rates by 0.1% percentage point.
“Even if the BOJ were to end our negative interest rate policy, it’s hard to imagine a path in which it would then keep raising the interest rate rapidly,” Uchida said.
Owing to his history of providing significant policy clues, the markets attentively followed Uchida’s statements, which increase the likelihood that the BOJ would soon remove short-term interest rates from negative territory.
Following his statements ruling out the possibility of swift rate rises, investors responded by selling the yen and increasing the yield on Japan’s 10-year government bond, while the Nikkei stock average increased.
The 10-year government bond yield is centered at 0%, while short-term interest rates are guided around -0.1% under the BOJ’s enormous stimulus program. In order to stimulate the economy, it also purchases riskier assets including government bonds.
Uchida said that if the BOJ determines that persistent accomplishment of 2% inflation is within reach, it would be “natural” for it to stop buying riskier assets like exchange-traded funds (ETF) and trust funds investing in real estate.
In addition, he said that the BOJ would not drastically cut down on its purchases of government bonds and would make sure that long-term interest rates would not suddenly rise once it stopped controlling bond yields.
“If the BOJ does revise the framework, it would incline more toward letting market forces determine interest rates,” Uchida said. “In doing so, however, it will take careful measures so as not to create discontinuity before and after the revision.”
Uchida, a career central banker, has contributed significantly to the development of negative interest rates and yield curve control (YCC), two key components of the BOJ’s huge stimulus program. His opinions are thus considered crucial to the schedule and strategy for destroying the program.
According to individuals who spoke with Reuters, the BOJ has been preparing to remove negative rates by April and revise other aspects of its ultra-loose monetary framework. However, given the uncertainties that remain, any further policy tightening is probably going to be gradual.