BOJ split on measures to stabilise bond market

Board meeting will hear opposing views on move to double maturity of loans to banks

PUBLISHED : Friday, 07 June, 2013, 12:00am
UPDATED : Friday, 07 June, 2013, 3:46am


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The Bank of Japan is divided over whether to authorise a measure designed to quell bond-market volatility, with some officials concerned it would return the BOJ to a pattern of incremental steps that failed in the past, say people familiar with the discussions.

At issue is whether the board, which meets on Monday and Tuesday, should give its financial markets department the power to double the maturity of loans it extends to banks to two years.

An opposing view was that the step was a useful backup in case of a spike in fluctuations in the government bond market, the people said, asking not to be named because the talks are private.

The debate reflects the challenge for a central bank trying to persuade investors, businesses and households that its unprecedented monetary stimulus unveiled on April 4 will be enough to end Japan's 15 years of entrenched deflation.

A stock slump and jump in bond yields over the past month risk hurting confidence that policy makers will succeed in reviving the economy.

"The bank is in a very tough position - it's going to be interesting to see how it will defend its stance," said Chotaro Morita, Tokyo-based chief strategist for fixed income at Barclays.

"The best solution for now may be to extend the duration to two years and make it clear it's temporary. The extension would be effective, but market participants would wonder if this is easing" policy in an incremental way, just as before, he said.

Also looming at next week's meeting is the possibility of a decision whether to increase the cap on central bank purchases of real estate investment trusts.

The 138 billion yen (HK$10.7 billion) effort since December 2010 has been credited with contributing to a resuscitation in the nation's property market two decades after its post-bubble collapse.

The central bank's purchases so far in this year amount to 98.7 per cent of a self-imposed limit for the year of 140 billion yen.

One view among policymakers is that the cap should not be raised because such a move could be seen as an incremental step, according to people familiar with the bank's discussions. Governor Haruhiko Kuroda says he will do everything possible to achieve a goal of 2 per cent inflation, avoiding "gradualism" or "incremental" efforts.

Goldman Sachs Group economist Naohiko Baba said the central bank should "urgently" stabilise long-term interest rates, with increases in yields threatening to derail economic gains.

Ten-year yields have tripled from a record low of 0.315 on April 5.