BOJ Plans Policy Sustainability Review as Price Falls Deepen

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The Bank of Japan pledged Friday to assess the sustainability of its easing policy without changing its main framework just hours after data showed consumer prices falling at the fastest pace in a decade.

At the end of the two-day policy meeting, the BOJ also kept its key interest rates and asset purchases unchanged, and extended its special support programs for pandemic-hit businesses by six months, a combination expected by a majority of economists.

The bank said it saw no need to change its yield-curve-control policy framework with quantitative easing as part of the review. The bank said it would likely announce the findings in March.

The move came just hours after the latest inflation data showed core consumer prices falling by 0.9%, the fastest pace in more than a decade and well before the start of Governor Haruhiko Kuroda’s ambitious program to generate stable inflation and rid Japan of years of deflation.

The current yield curve control framework emerged in September 2016 after a comprehensive assessment of policy. The framework has stayed intact since then, with only minor tweaks, and been closely examined by other global banks. The Reserve Bank of Australia adopted some parts of the YCC framework earlier this year.

“The BOJ is concerned about how long inflation will be short of its 2% target,” said Harumi Taguchi at IHS Markit. “As rates come down globally, the gap between policy and prices has become so wide. Nonetheless, I don’t think they will drop the 2% target right away. So they may change its stance on hitting the target as early as possible.”

The planned sustainability review comes after several BOJ board members in recent weeks made comments indicating a rising awareness of the risks from the bank’s prolonged monetary easing, especially given that reaching the BOJ’s inflation goal could take a long time. What to do with the bank’s rising holdings of exchange-traded funds is among the question areas.

Bank of Japan Eyes Sustainability After Decade of ETF Buying

The BOJ may also have decided to announce its policy sustainability review with the awareness that Japan’s currency could come under pressure if investors see it as being less aggressive than other central banks at its last meeting of one of the most fraught years in memory.

The Bank of England overnight also extended a crisis loan program. The Federal Reserve on Wednesday said it will maintain its asset purchases program until it sees substantial progress in the U.S. economy. The European Central Bank last week increased its emergency bond buying.

Steeper falls in exports and record virus cases at home are already weighing on Japan’s rebound, and government moves to keep people home over the holidays is likely to slow growth further.

Still, with financial markets and credit conditions holding up, the BOJ chose to hold fire on its main policy tools.

— With assistance by Yoshiaki Nohara, and Yuko Takeo

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