KOFU, Japan (Reuters) - Dissenting Bank of Japan board member Takahide Kiuchi warned that raising the bank’s bond yield target near-term would be problematic as inflation remains well below its 2 percent goal.
Hiking the yield target may also heighten difficulties for the BOJ’s attempt to cap bond yields by spurring market speculation that more rate increases are forthcoming, which could prompt investors to dump government bonds, Kiuchi said.
His comments highlighted the challenges for a new policy framework that is already facing headwinds from rising global interest rates.
Kiuchi, a sole proponent in the nine-member board of winding down the BOJ’s massive stimulus program, reiterated on Thursday his calls for the central bank to normalize its unconventional monetary easing steps at an “appropriate timing.”
He criticized the objective of capping 10-year government bond yields around zero, saying that this could force the bank to top up an already huge bond buying operation and make it unsustainable.
A growing number of analysts now expect the BOJ’s next step to be a withdrawal, not an expansion, of stimulus most likely through an increase in its 10-year yield target.
But Kiuchi said changing the BOJ’s yield target would not be easy, as doing so frequently could erode its credibility.
“It would be unreasonable to raise the 10-year bond yield target in the near future when the inflation rate remains at a low level,” Kiuchi said in a speech to business leaders in Kofu, in the eastern Japanese prefecture of Yamanashi.
Japan’s core consumer prices fell 0.2 percent in December from a year earlier, the slowest annual pace in nearly a year but marking the 10th straight month of declines.
“Changing the yield target frequently could spur market speculation of more rate hikes, putting upward pressure on Japanese yields and making it tougher to control them,” Kiuchi later told reporters. “The BOJ’s policy could reach a deadlock.”
The BOJ revamped its policy framework in September last year to one better suited for a long-term battle with deflation, after three years of aggressive asset purchases failed to accelerate inflation to 2 percent.
It now guides short-term interest rates at minus 0.1 percent and the 10-year bond yield around zero percent through massive bond purchases.
The BOJ’s attempt to control the yield curve has faced challenges as global long-term interest rate rises, driven by expectations of steady rate hikes by the U.S. Federal Reserve, put upward pressure on Japanese long-term rates.
Bond prices whipsawed this year after the BOJ made several abrupt changes in its market operations as it struggled to keep global yield rises from pushing up Japanese long term rates, creating new problems for the central bank in its daily dealings with financial markets.
“Beneath this problem lies the inherent difficulties of this policy, which will only increase over the course of time,” Kiuchi said.
A former market economist, Kiuchi has been the sole opponent of the BOJ’s massive asset-buying program and has been proposing unsuccessfully to taper asset purchases.
He also voted against the BOJ’s September decision to move to a new policy framework, calling instead to target and scale down the bank’s pace of money printing.
Reporting by Leika Kihara; Editing by Simon Cameron-Moore