BoJ monetary review aiming at protecting banks

The Bank of Japan (BoJ) announced last Friday the results of the monetary policy assessment*. As the prolonged massive asset purchase has failed to achieve the 2% inflation target, the Bank introduced measures to increase policy flexibility with a larger room for further cuts in the policy rate.

Firstly, the BoJ expanded the fluctuation band for the 10-year JGB yield to 0.25% from 0.20%. With a quick steepening of the US yield curve, the BoJ would need this flexibility (Chart 1), as they already hold 44.7% of outstanding JGBs.

Secondly, the central bank removed the ongoing target of asset purchases for ETFs and J-REIT-s, while keeping the upper ceiling of JPY 12 tr and JPY 180 bn respectively. These changes will allow the BoJ to focus their asset purchase during a market downturn.

Thirdly, the BoJ introduced a new loan scheme which would provide incentives to expand lending. The incentive will increase with a lower policy rate, which would in turn create more room for rate cuts.

Lastly, the Bank will effectively remove some of the burden from regional and foreign banks consistently paying negative rates (Chart 2). Specifically, the Macro Add-on Balance on the tiering system, where a 0% interest rate is applied to their reserves, will increase by changing the base year to 2019.

All in all, the BoJ decided to reduce the burden of the prolonged negative interest rate policy, which has weakened the monetary transmission mechanism. The Bank also increased the flexibility of its policy, by expanding the fluctuation band of yield curve control and removing the ongoing target of asset purchases for ETFs and J-REITs. Furthermore, the Bank introduced a new loan with an incentive to expand lending, which will increase with a lower negative policy rate. Therefore, this scheme would allow the BoJ to cut rates further, should the Yen the strengthen significantly.