By Leika Kihara
TOKYO (Reuters) -The Bank of Japan (BOJ) must be ready to work further towards improving market functions if needed, a central bank policymaker said at a March meeting, underscoring the bank’s concern over the rising cost of its bond yield control policy.
While global banking woes have taken some upward pressure off long-term interest rates, the debate underscores the challenge incoming BOJ Governor Kazuo Ueda faces in keeping borrowing costs low – without draining market liquidity with aggressive bond buying.
At the March meeting, the BOJ maintained its ultra-loose policy, including a controversial 0.5% cap for the 10-year bond yield that had come under attack from markets betting on a near-term interest rate hike.
Many BOJ board members said the central bank must maintain its massive stimulus to support the economy and ensure Japan would sustainably achieve its 2% inflation target, the summary of opinions at the March meeting showed on Monday.
But some members voiced concern over lingering distortions in the yield curve, which the BOJ sought to contain in December by raising the 10-year bond yield cap to 0.5% from 0.25%.
“Although the widening of issuance spreads on corporate bonds has paused, the effects of deterioration in the functioning of the Japanese government bond (JGB) market remain and warrant close monitoring,” according to one opinion.
While steps taken since December have been effective to a certain extent, market functions have not been fixed fundamentally, according to another.
“It’s necessary to ensure the transmission of the effects of monetary easing is sustainable and effective by, if necessary, working to improve market functioning, including that of the corporate bond and swap markets,” said the official who made the second opinion.
Some board members also saw the risk of inflation overshooting expectations as more companies pass on rising costs to consumers and hike wages, the summary showed.
Japan’s core consumer prices rose 4.2% in January from a year earlier, hitting a 41-year high on soaring fuel and raw material costs.
Analysts polled by Reuters expect core consumer prices to rise 3.1% in February from a year earlier, slower than the pace of increase in January but still far exceeding the BOJ’s target.
At the time of the March meeting, the BOJ had been forced to ramp up bond buying to defend its 0.5% cap for the 10-year bond yield. The tussle with market participants betting on a near-term rate hike kept the 10-year yield pinned at the 0.5% ceiling, instead of fluctuating more freely as the BOJ had hoped.
The 10-year bond yield was 0.250% on Monday, well off the BOJ’s 0.5% cap, as investors loaded up on JGBs that are considered safe-haven assets favoured in times of market stress.
(Reporting by Leika Kihara; Editing by Christopher Cushing, Bradley Perrett and Christian Schmollinger)
