New Bank of Japan Governor Kazuo Ueda's main challenge will be to phase out its controversial yield curve control policy, which has come under criticism for distorting markets by keeping long-term interest rates from rising.
Ueda, who took office on Sunday, chairs his first policy meeting on April 27-28. In parliamentary hearings in, Ueda stressed the need to maintain ultra-low interest rates, but said he had ideas on how to exit the bank's massive stimulus.
One idea would be to widen the band set around the 10-year yield target, now set at 50 basis points on either side. Doing so could alleviate market distortions by allowing yields to move more freely. When the BOJ shifted to YCC from a policy targeting the pace of money printing, it used a thorough analysis of its policy framework to justify the shift. Ueda may opt to do the same if the BOJ were to overhaul the current framework.With less than three weeks until the April 27-28 meeting, Ueda may not have enough time to debate with his fellow board members on how and when the BOJ should tweak YCC.
It will also give the BOJ time to assess whether wage hikes will continue through next year. In judging this, the outlook for global growth is crucial including whether the U.S. Federal Reserve will keep raising rates or pause.The BOJ could abandon the 0.1% charge it applies for a small pool of excess reserves financial institutions park with the central bank. After ditching that negative rate, the BOJ could start paying interest on excess reserves to mop up liquidity from the economy.
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