The Bank of Japan’s decision to shift its policy target to the yield curve instead of quantitative easing was aimed at preparing for a long-term battle to achieve its 2 percent inflation goal, a summary of opinions at its September policy meeting showed Friday.
“Amid considerable downside risks to prices, it is imperative to ensure the sustainability of monetary easing and thereby prevent Japan’s economy from returning to deflation,” one member said at the Sept. 20-21 Police Board meeting. “The bank should adopt a new policy framework and implement necessary measures as appropriate.”
The opinion suggested some BOJ board members have given up on attaining the 2 percent inflation goal in the near future as the central bank has been running out of policy options.
The BOJ has failed to accomplish the inflation goal despite committing to doing so in “about two years” in early 2013.
Government data released Friday showed Japan’s core consumer price index stayed in negative territory for the sixth straight month in August, due in part to lower global oil prices and weak domestic spending following a 2014 consumption tax hike.
At the latest meeting, the BOJ decided to modify the framework of its bond-buying program to keep the yield of the bellwether 10-year Japanese government debt at around zero percent, while leaving its negative policy rate unchanged at minus 0.1 percent.
The introduction of the new policy objective, which the BOJ calls “yield curve control,” was apparently designed to alleviate the adverse effects of already massive asset purchases and the negative interest rate policy, such as an unexpectedly large plunge in longer-term interest rates.
“Compared with the previous policy framework, the new policy framework with yield curve control placed at the core will enable the bank to make more flexible adjustments according to economic, price, and financial developments, and will enhance the sustainability of monetary easing,” one member said.
Some members, however, voiced concerns over the effectiveness of adopting the new policy target, saying it is uncertain whether the BOJ can control the yield curve as intended.
“There would be a risk that the bank might need to increase the pace of Japanese government bond purchases in response to a spike in long-term interest rates,” one member said.