UPDATE 3-BOJ's Kuroda wants to combine JGB buying schemes, need debate on durations
* Combining schemes would allow more purchases of L/T debt * Kuroda repeats pledge of hitting BOJ's price goal in 2 yrs * BOJ set to ease this week, debate overhaul of framework * Abe says not asking BOJ to hit price target at all costs By Leika Kihara and Stanley White TOKYO, April 2 (Reuters) - New Bank of Japan Governor Haruhiko Kuroda said he wants to combine two different schemes that the central bank uses to purchase government debt, reinforcing expectations of bold monetary stimulus ahead of his first policy-setting meeting on Thursday. Combining the two schemes would make it easier for the BOJ to buy longer-term debt as Kuroda looks to aggressively expand the central bank's balance sheet and achieve 2 percent inflation in two years. But his pledge for aggressive stimulus faced heat in parliament for relying too much on the psychological impact of any action, while a plunge in workers' bonus payments underscored the challenges the central bank faces in trying to put an end to nearly two decades of grinding deflation. Prime Minister Shinzo Abe also said he is not necessarily asking the BOJ to achieve its price target "at all costs," as factors beyond the bank's control, such as global economic developments, may sway future price moves. "My intention is to combine the two bond-purchasing operations we currently have to make our monetary policy easier to understand," Kuroda told lawmakers in the lower house budget committee. "I won't exclude any options, but it is up to the monetary policy committee to debate which durations we would buy." Speaking a day before the start of the two-day rate review, Kuroda reiterated his pledge of achieving the BOJ's inflation target in two years by taking aggressive monetary policy both in terms of the volume and type of assets it purchases. "It is not easy to beat deflation, which has continued in Japan for 15 years. But the BOJ will use all options available and do whatever it takes to show markets its strong commitment," he told the same parliament committee. Under an asset-buying program, its key monetary easing tool, the BOJ plans to buy 44 trillion yen ($471.8 billion) in bonds with up to three years to maturity by year-end. The BOJ will likely switch to open-ended asset purchases at the meeting ending on Thursday and buy 2 trillion yen in bonds every month without setting a deadline, sources familiar with the central bank's thinking have said. The BOJ also buys 21.6 trillion yen in long-term bonds, including those with durations exceeding 10 years, outright annually under another program, dubbed "rinban", which is not tied to monetary policy. Combining the asset-buying with "rinban" operations would allow the BOJ to buy longer-dated bonds, mainly five-year and 10-year bonds, more easily and clarify how much it is expanding its balance sheet. "The economy is a living thing, so we don't know what could happen in the future. What's important is for the BOJ to make efforts toward its goal. If it can't meet the target, it has a responsibility to explain why. If it has a good explanation, that's fine," Abe said in the same committee. Still, Abe said he will not rule out as a future option a revision to the BOJ Law if it fails to meet its policy commitment. The law guarantees the central bank's independence from the government in guiding monetary policy. DOSE OF SCEPTICISM The central bank is expected to ramp up its bond buying, extending the maturity of bonds it buys from the current three years, and debate an overhaul of its policy framework at the two-day rate review that kicks off on Wednesday. But Kuroda sidestepped the question of how much the economy would need to grow in order for prices to rise by 2 percent, when grilled by an opposition lawmaker that his plans may be relying too much on the psychological impact of easing policy. It will take time for Japan's output gap to narrow enough to push up prices, but the BOJ can speed up the pace by heightening inflation expectations with aggressive easing, he said. "It's important to communicate well our strong commitment to change market expectations. It's also important to meet expectations with action, so we will take bold easing measures," he said. Under pressure from Abe to take bolder action, the BOJ eased policy and doubled its inflation target to 2 percent in January. But analysts doubt whether Japan can see such a level soon with consumer prices still barely rising. Base money, or cash and reserves at the BOJ, jumped 19.8 percent in March from a year earlier to reach 134.7 trillion yen ($1.44 trillion), exceeding the previous record hit in December last year, central bank data showed on Tuesday. Current account deposits commercial banks park with the BOJ soared 72.2 percent to 47.4 trillion yen as the bank pumped money into the economy through asset purchases, the data showed. But the huge pile of money has failed to end deflation or boost wages. Wage earners' total cash earnings fell 0.7 percent in February from a year earlier as winter bonus payments declined the most in three years, a separate data showed on Tuesday. Some central bankers, such as former BOJ Governor Masaaki Shirakawa, have also warned that by buying too much government bonds, the central bank can trigger a spike in bond yields by giving markets the impression it is monetising public debt. New BOJ Deputy Governor Kikuo Iwata told Tuesday's parliament that it was important that Japan ensures its bond yields do not rise due to investors demanding an increased risk premium for holding debt.
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