Japan in Dire Need of Monetary Support

Bank of Japan Deputy Governor Hiroshi Nakaso said Japan’s economy still needs massive monetary support given overseas uncertainties and stubbornly weak price growth, shrugging off market speculation it may raise its bond yield target this year.

 He also said Group of 20 nations recognize that Japan abides by a joint agreement to refrain from using monetary policy to manipulate exchange rates, arguing against criticism from US President Donald Trump that Japan was using an ultra-easy policy to weaken the yen and give its exports an unfair trade advantage, Reuters reported.

“The BoJ guides monetary policy solely for the purpose of achieving its inflation target at the earliest date possible. It does not target exchange rates,” Nakaso told reporters Thursday, when asked about Trump’s accusation.

Nakaso said that while Japan’s economy was recovering moderately, risks to the outlook were skewed to the downside due to uncertainty over US policies and weak price growth at home.

 “Some market players, taking into account recent rises in overseas interest rates, argue that the BoJ might consider raising its long-term rate target,” Nakaso said in a speech to business leaders in Kochi, western Japan.

 “But the momentum toward achieving our price target, while sustained, isn’t sufficient. There’s still a long way to go to achieve our target,” he said. “I believe it’s most important that the BoJ persistently pursue powerful monetary easing.”

 Doubts over the BoJ’s resolve to keep Japanese government bond yields from tracking global long-term interest rates drove the 10-year JGB yield to a one-year high last week, forcing the bank to conduct a special bond buying operation.

The rise in long-term rates challenged the BoJ’s commitment to its “yield curve control” scheme introduced in September, under which it guides the benchmark yield around 0% in a bid to accelerate inflation to its 2% target.

Nakaso said the conditions for raising the BoJ’s yield targets would be for long-term interest rates to rise in sympathy with an improvement in the economy.  He stressed, however, that the BoJ’s priority now was to achieve its inflation target through aggressive monetary easing.

“The BoJ is ready to buy sufficient and necessary amounts of government bonds to meet its yield targets,” Nakaso said, adding the current shape of Japan’s bond yield curve was consistent with what the BoJ deemed appropriate.