Bank of Japan maintains promise to keep extremely low rates for ‘Extended Period’

Bank of Japan Gov. Haruhiko Kuroda said the governThe Bank of Japan reiterated Wednesday that it would keep interest rates extremely low “for an extended period,” holding to forward guidance it first introduced in July.

The central bank decided to stand pat on policy after making a number of tweaks in July to prepare for a longer-than-expected fight to lift inflation, which has yet to reach the central bank’s 2% target.

Members of the BOJ’s policy board have been debating in recent speeches whether the central bank should do more to help commercial banks, whose lending margins have been squeezed by low interest rates.

Prime Minister Shinzo Abe added to the debate on Sept. 14 when he said the BOJ’s large-scale monetary easing couldn’t continue indefinitely. Mr. Abe said he wanted to set a path toward normalizing policy during his next three-year term as ruling-party leader if he is re-elected Thursday, as is widely expected. He said when and how to do that would be up to central bank Gov. Haruhiko Kuroda.

Asked about Mr. Abe’s remarks at a regular news conference Wednesday, Mr. Kuroda said the government and the central bank shared the same view about easing and its side effects.

“Any central bank would want to achieve its goal as soon as possible and enter the process of normalization,” Mr. Kuroda said. But given Japan’s stubbornly low inflation and sluggish wage growth, it will likely take longer than initially expected to begin that process, he said.

Mr. Kuroda said the banking industry was sound and that there were no signs of overheating in asset prices, playing down concerns that banks, in their bid to boost profits, might resort to unwise lending.

Takeshi Yamaguchi, an economist at Morgan Stanley MUFG Securities, said the BOJ “must be aware of the risk that it may cause problems for the stability of the financial system.” He said he expected the central bank to end its negative-interest-rate policy and raise its short-term interest-rate target to zero around April 2019 to tackle those risks.

At Wednesday’s policy meeting, the BOJ policy board voted 7-2 to keep all current policies, maintaining shorter-term interest rates at minus 0.1% and targeting a zero yield for the 10-year Japanese government bond while allowing the yield to fluctuate around the target.

Board members Goushi Kataoka and Yutaka Harada, both known as advocates of strong measures to generate inflation, dissented, as they did in July.

The bank also reiterated that it would buy Japanese government bonds at an annual pace of ¥80 trillion ($712 billion), a passage seen by investors as a gauge of commitment to easing, although the actual pace of JGB purchases fell to ¥45 trillion in the most recent 12-month period.

Re-disseminated by The Asian Banker from The Wall Street Journal

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