BOJ saw need to let markets drive yields upon March exit, minutes show

By Leika Kihara

TOKYO (Reuters) -Many Bank of Japan board members agreed the country’s long-term interest rates should be set by markets, with some saying the central bank should at some point slow the pace of bond buying, minutes of their March policy meeting showed on Thursday.

At the March meeting, the BOJ ended eight years of negative interest rates and its bond yield control in a historical shift away from its prolonged radical stimulus programme.

“With respect to yield curve control, many members expressed the view that it was appropriate for the Bank to change its framework. These members shared the view that long-term interest rates would be determined by financial markets in principle,” the minutes showed.

While one member said the BOJ should take time adjusting the pace of bond buying, others saw the need to breathe life back to a market made dormant by its huge presence, the minutes showed.

“Some members expressed the view that it was desirable for the Bank to reduce the amount of Japanese government bond (JGB) purchases at some point in the future, and also reduce the amount outstanding of its JGB holdings through redemptions of JGBs,” the minutes showed.

The remarks underscore the BOJ’s resolve to start tapering its bond-buying once markets restore calm from the March policy shift, and eventually reduce its massive balance sheet.

At a subsequent meeting in April, the BOJ kept interest rates around zero but projected inflation to stay near its 2% target in coming years. It also made no change to its guidance offered in March to keep buying government bonds at roughly a pace of 6 trillion yen ($38.5 billion) per month.

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Financial markets are focusing on when the BOJ could start to significantly reduce its bond buying, with some traders betting it could do so soon to allow long-term yields to rise and help slow the yen’s declines.

BOJ Governor Kazuo Ueda on Friday brushed aside the chance of using the bank’s bond buying or its monetary policy as tools to directly influence the yen.

In a sign the BOJ could face political push-back in raising rates further, government representatives who attended the March meeting voiced hope the central bank will keep supporting the fragile economy with low interest rates, the minutes showed.

“The BOJ must continue firmly offering financial support to the economy to ensure it achieves sustainable growth led by private demand,” a Cabinet Office official was quoted as saying.

At the March meeting, the board also discussed staff findings on the long-term impact of the BOJ’s past monetary easing measures, including on the exchange-rate market.

A few members said the yen’s value had deviated notably from purchasing power parity. One of them said this might be because market players have come to focus more on the interest-rate gap between Japan and other countries, the minutes showed.

Another member said there were significant differences between current stock and exchange-rate levels, and those before the BOJ’s introduction of massive monetary stimulus in 2012.

This member said the differences could be a result of changes in the transmission mechanism of monetary policy, as well as its positive ripple effects and side effects, the minutes showed.

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