By Leika Kihara
CHIBA, Japan (Reuters) -The Bank of Japan’s decision last week to tweak its bond yield control policy was aimed at making its massive stimulus more sustainable, not a prelude to an exit from ultra-low interest rates, its deputy governor Shinichi Uchida said on Wednesday.
Uchida said there was still a long way to go before conditions fall in place for the BOJ to raise its short-term interest rate target from the current -0.1%.
“We made our policy more flexible to patiently continue with monetary easing,” Uchida said. “Needless to say, we do not have an exit from monetary easing in mind.”
He added the BOJ stood ready to step in to stem sharp rises in long-term interest rates, even before the 10-year bond yield hits the newly set 1.0% cap.
“Depending on the speed of the moves, we will step in to stop the rise,” Uchida told reporters after meeting business leaders in Chiba prefecture. “If economic and price conditions remain roughly unchanged, I don’t expect interest rates to rise sharply.”
Under a policy called yield curve control (YCC), the BOJ has guided short-term interest rates at -0.1% and the 10-year bond yield around 0%. It also set an allowance band of 0.5% up and down around the 10-year yield target.
The central bank last week stunned markets by modifying YCC to allow long-term interest rates to rise more freely in line with increasing inflation.
While the bank left unchanged its interest rate targets and the allowance band, it said it would now allow the 10-year yield to rise by as much as 1%.
There was a risk inflation could accelerate further and put upward pressure on long-term interest rates, Uchida said. By allowing yields to rise more freely, the BOJ could avoid causing volatile moves in bond and currency markets, he added.
“Every policy has its positive effects, but it also always comes with costs. There is no free lunch for any policy,” Uchida said in a speech.
“When inflation expectations rise, not only the easing effects but also the side effects strengthen. It is necessary to strike an optimum balance between the two,” he said.
The BOJ did not have a pre-set schedule in mind on how soon it could raise interest rates, Uchida told the news conference.
“If economic and price conditions change from now, we might need to respond. If they don’t change much and long-term rates don’t move much, however, our current policy is quite robust,” he said, suggesting the BOJ was done fine-tuning YCC for now.
He also said the BOJ would maintain the yield targets until inflation sustainably and stably hits its 2% target.
“Japan’s deflationary mindset is starting to change. By nurturing this change, we can achieve our 2% target,” he said.
(Reporting by Leika Kihara; Editing by Shri Navaratnam, Jamie Freed and Sam Holmes)
