By Tomo Uetake
TOKYO (Reuters) – The Bank of Japan’s assertion that it can control the entire span of market interest rates is an exaggeration as in practice it is only targeting the benchmark 10-year bond yield, former BOJ board member Atsushi Mizuno said.
Mizuno, in a telephone interview with Reuters on Friday evening, shared some of the scepticism that has greeted the BOJ’s change in policy to “yield curve control”.
He said the new strategy showed the BOJ was stepping back from its lead role in stimulating the economy, putting the onus on Prime Minister Shinzo Abe’s government to boost spending.
Last month the BOJ shifted away from targeting the amount of assets it buys to flood the economy with cash, instead focusing on controlling yields of all maturities.
Specifically the bank aims to guide 10-year yield “around zero percent” while maintaining a negative 0.1 percent rate for some reserves that commercial banks park with the BOJ.
Yield curve control “is a misnomer,” said Mizuno, Japan vice chairman of Credit Suisse Securities, who was a popular bond strategist before his 2004-2009 stint as a BOJ policymaker.
“Yield curve control sounds as if the BOJ had some kind of world-beating market-operation technique,” he said. “In reality, it has only committed itself to two things, interest rates on excess reserves and the 10-year yield.”
The BOJ’s new approach follows a comprehensive review of the “quantitative and qualitative” easing policy that in three-and-a-half years has failed to generate the 2 percent inflation that BOJ Governor Haruhiko Kuroda initially promised would take two years.
Mizuno said the BOJ was handing off to the government the role of “lead runner for Abenomics” – a three-pronged strategy of monetary expansion, fiscal stimulus, and structural reform.
“The BOJ could have quietly left the stage, but instead they took such a grandiose posture,” he said.
“It was almost like a kabuki performance,” he added, referring to the traditional Japanese form of lyrical theater and dance that involves exaggerated gestures and expressions and melodramatic plots.
“To me, the bank’s idea that it can control bond yields, seems very arrogant.”
NEGATIVE OVERNIGHT RATE
Yield curve control aims to prevent an “excessive flattening” of the yield curve, which hurts bank profits by squeezing the gap between the short-term interest rates at which they borrow and longer-term rates at which they lend.
But the policy is facing a test by investors, as the market has pushed the 10-year yield below zero, giving the central bank few palatable options to bring it back up.
The BOJ on Friday reduced its purchases of bonds with five to ten years to maturity by 20 billion yen ($197 million) to 410 billion yen ($4.04 billion), and said it plans to trim buying of long-dated debt in market operations this month.
Reduced buying should push bond prices down and yields up, but it risks giving the appearance the BOJ is reducing its monetary stimulus – something Kuroda has said he wouldn’t do.
The move, coming after the 10-year dropped to minus 0.090 percent, was taken by many in the market as a sign that for now the BOJ sees minus 0.10 percent – the level of the overnight negative rate on reserves – as the floor of its target range for the 10-year.
But Mizuno said the BOJ could let the yield fall below that level in the future, depending on market and economic conditions, such as the level of the yen and real interest rates, rather than nominal ones.
The BOJ will likely be flexible in its market operations to leave some volatility in the market, he said, as the central bank needs to give some incentives to traders who have done “the BOJ trade” – buying government bonds at the Finance Ministry’s auction and immediately selling them on to the BOJ at a higher price and lower yield.
“Without such incentives, dealers may be unwilling to bid at auctions that could possibly destabilize debt auctions as well,” Mizuno said.
(Reporting by Tomo Uetake; Editing by William Mallard and Simon Cameron-Moore)