Setting bond yield cap may be future BoJ option

Setting a cap on long-term interest rates and buying bonds to keep yields below that level may be a realistic option for the Bank of Japan if it were to overhaul its massive stimulus programme in the future, a former top BoJ economist said.
Hideo Hayakawa, well-versed in the BoJ's policy drafting, also said the central bank should review the feasibility of having base money as its policy target when it conducts a comprehensive assessment of policy framework in September.
"If the BoJ's main goal is to push down long-term rates, one feasible idea is to set an interest rate cap. The BoJ already holds enormous amounts of government bonds, so it can probably keep yields low without buying too much further," Hayakawa told Reuters on Tuesday.
"This is quite a realistic option. But the BoJ needs to abandon its base money target to do this, which would be a challenge," he added.
Under a massive stimulus programme adopted in 2013, the BoJ now buys roughly 110-120 trillion yen ($1.07-$1.17 trillion) of Japanese government bonds (JGB) a year to meet a pledge to expand base money - or cash and deposits at the central bank - at an annual pace of 80 trillion yen.
BoJ Governor Haruhiko Kuroda has stressed that there are no limits to monetary easing and that the bank can accelerate JGB purchases if needed to hit a 2 percent inflation target.
But analysts warn the bank will face trouble maintaining the current pace of buying in few years' time as it already holds one-third of the entire JGB market. Hayakawa, now a senior analyst at private think tank Fujitsu Research Institute, said the BoJ should abandon its base money target so it can slow JGB purchases to a more sustainable pace. To avoid any unwelcome spike in bond yields, the central bank can instead set a target ceiling for long-term rates and buy JGBs to keep yields below that level, he said.
"This may be the better option particularly for a country like Japan, which has a huge fiscal deficit," Hayakawa said.
Reviewing the feasibility of the balance sheet target should be the top priority when the BoJ conducts an assessment of its policies at the next rate review in September, Hayakawa said.
The BoJ expanded stimulus last month by doubling purchases of exchange-traded funds (ETF) but held off on topping up buying of JGBs, disappointing investors hoping for bolder steps. The central bank, however, said it will conduct next month a comprehensive assessment of the effects of negative interest rates and its asset-buying programme, dubbed "quantitative and qualitative easing" (QQE).
The announcement has triggered a spike in bond yields last week on market speculation the assessment may lead to a tapering of the BoJ's massive asset purchases.