Oct 31 (Reuters) - The Bank of Japan kept monetary policy steady on Thursday as expected but offered a stronger signal it may cut interest rates in future, underscoring its concern that overseas risks could derail the country’s fragile economic recovery.
The decision came hours after the U.S. Federal Reserve lowered rates again on Wednesday but signalled a pause in further cuts unless the economy took a turn for the worse.
The BOJ, which has far less policy ammunition, kept its short-term rate target at -0.1% and that for the 10-year government bond yield at around 0%.
Following are comments from BOJ Governor Haruhiko Kuroda at his post-meeting news conference: POLICY STANCE “Our new forward guidance is aimed at clarifying our stance that our policy bias is leaning towards additional monetary easing.” “Our new forward guidance shows that we won’t see an end (to ultra-low rates) until way beyond spring 2020. We’ve said rates could remain low, or even lower, for some time.” TOOLS FOR POLICY EASING “We can cut interest rates, increase asset buying or accelerate the pace of increase in base money. We have various options and what tools we use will depend on economics, price, and financial developments at the time. We can combine them or take the most appropriate step. We haven’t narrowed our options just to interest rate cuts.”
ECONOMIC OUTLOOK “Overseas economic risks are heightening. But the negative impact hasn’t spread much to the domestic demand. It’s not as if economic conditions have worsened sharply since our last policy meeting.”
WHETHER THE BOJ COULD CONSIDER ADDING A SHORTER TERM BOND YIELD TARGET, OR SHIFT TO ONE FROM THE CURRENT 10-YEAR YIELD TARGET “We’re not discussing such an idea at the board now. I can see where such an idea is coming from, but it is hard to say anything about it.”
OCTOBER SALES TAX HIKE IMPACT “The impact (on consumption) appears to be small compared with the last tax hike in 2014. But we need to look at upcoming data to examine how the impact could play out.”
WHETHER THE BOJ WILL TAKE STEPS TO MITIGATE THE COST OF EASING IF IT WERE TO EXPAND STIMULUS “That will depend on economics, price, and financial developments at the time... But the fact that any easing step would have costs won’t keep us from loosening policy. We need to carefully weigh the pros and cons of each policy. If needed, we will take steps to mitigate the side-effects of monetary easing.”
WHEN ASKED HOW MUCH THE BOJ CAN DEEPEN NEGATIVE RATES “The BOJ applies a -0.1% rate to only a small portion of reserves, whereas deeper negative rates are applied to a much bigger pool of funds in European countries. In that sense, it may appear that the BOJ has quite some room to deepen negative rates from here.” “On the other hand, European commercial banks still earn more interest (than its Japanese peers). That may suggest the impact of negative rates may be smaller on European banks than that on Japanese banks.” “It’s still possible for the BOJ to deepen negative rates in Japan... It’s not as if we cannot deepen negative rates beyond the current -0.1%.”
WHETHER THE NEW FORWARD GUIDANCE COULD TRIGGER AN UNWELCOME FALL IN SUPER-LONG BOND YIELDS “Of course there could be an impact. But we don’t see the need to push down super-long yields further. On the contrary, it’s undesirable as it could indirectly hurt consumer confidence by affecting investments of pension funds and insurance firms.” “To stimulate the economy, lowering short- to medium-term interest rates is most effective. I don’t think (our new forward guidance) will push down super-long yields that much.” “If the yield curve flattens too much, we can tweak our market operations. There are various ways to address this problem, such as further slowing our purchases of super-long bonds.”
Reporting by Leika Kihara; editing by Uttaresh.V